Technical Line: Lessee model comes together as leases project progresses

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1 Applying IFRS IFRS 15 Revenue from Contracts with Customers A closer look at IFRS 15, the revenue recognition standard (Updated October 2018)

2 Overview ntities have recently adopted the largely converged revenue standards , Many e 15 and Accounting Standards IFRS Revenue from Contracts with Customers 1 606, (together Codification (ASC) Revenue from Contracts with Customers , that with IFRS 15, the standards) in 2014 by the International were issued Accounting Standards Board (IASB or the Board ) and the US Financial ASB) ( . The standards Accounting Standards Board (F collectively, the Boards) legacy supersede virtually all revenue recognition requirements in IFRS and US GAAP, respectively. The standards provide accounting requirements for all revenue arising from contracts with customers. They affect all entities that enter into contracts to provide goods or services to their customers, unless the contracts are in the scope of other IFRSs or US GAAP requirements, such as the leasing standards. The standards also specify the accounting for costs an entity incurs to obtain 9.3) or s ection services to customers (see and fulfil a contract to provide goods provide a model for the measurement a nd recognition of gains and losses and on the sale of certain non financial assets, such as property, plant or equipment - (see section 2.1.1) . As a result, entities that adopted the standards often found implementation to be a significant undertaking. This is b ecause the standards affect ed entit ies ’ financial statements, business processes and internal controls over financial For entities that have not yet adopted the standards, successful reporting. implementation will require an assessment and a plan for manag ing the change. Following issuance of the standards, the Boards created the Joint Transition Resource Group for Revenue Recogniti on (TRG) to help them determine whether more application guidance was needed on the standards. TRG members include financial st atement preparers, auditors and users from public and private entities. a variety of industries, countries , as well as Members of the TRG met six times in 2014 and 2015. In January 2016, schedule further the IASB announced that it did not plan to meetings of the IFRS ould monitor any discussions of the FASB , but said it w constituents of the TRG and TRG November 2016. The November 2016 meeting was , which met in April . the last scheduled FASB TRG meeting views are non TRG members’ authoritative, but entities should consider them as - they implement the standard In its July 2016 public statement, the European s. e ncouraged issuers to consider Securities and Markets Authority (ESMA) 2 15. the TRG discussions when implementing IFRS Furthermore, t he Chief Ac countant of the US S ecurities and E xchange C ommission (SEC) has encouraged SEC registrants, including foreign private issuers (that may report under IFRS) to consult with his office if they are considering applying the , TRG members that differs from the discussions in which standard in a manner 3 reached general agreement. 1 Throughout this publication, when we refer to the FASB’s standard, we mean ASC 606 (including the recent amendments), unless otherwise noted. 2 ESMA Public Statement: Issues for consideration in implementing IFRS 15: Revenue from Contracts with Custo mers , issued 20 July 2016, available on ESMA's website . 3 Speech by Wesley R. Bricker, 5 May 2016. Refer to SEC website at 05 - bricker 16.html - 05 - https://www.sec.gov/news/speech/speech - Updated October 2018 2 closer look at IFRS 15, the revenue recognition standard A

3 We have incorporated our summaries of topics on which TRG members generally 2015 and at FASB - only TRG meetings in at joint meetings in 2014, agreed throughout this publication. Un less otherwise specified, these summaries 2016 TRG members representing IFRS represent the discussions of the joint TRG. constituents did not participate in the April 2016 and November 2016 s . However, certain members of the IASB and its staff observed meeting the meeting and , during subsequent Board meetings, the IASB s received oral update s . Where possible, we indicate if members of the IASB or its staff commented on the FASB TRG discussions. ments) This publication summarises the IASB’s standard (including all amend and highlights also the FASB’s standard. It significant differences from topics on which the members of the TRG reached general agreement addresses and discusses our views on certain topics. While many entities have adopted the standards, implementation issues may continue to arise. Accordingly , t he views we express in this publication as may evolve implementation continues and additional issues are identified . The conclusions we describe in our illustrations are also subject to change as views evolve. C onclusions in seemingly similar situations may differ from those reached in the illustrations due to differences in the underlying facts ey.com/IFRS for our most recent revenue Please see and circumstances . . publications A closer look at IFRS 15, the revenue recognition standard Updated October 2018 3

4 Contents ... ... ... 2 Overview ... ... .. 7 1. Objective, effective date and transition ... ... ... ... 1.1 Overview of the standard 7 ... ... ... 8 1.2 Effective date 1.3 Transition methods ... ... ... 10 2. Scope ... ... ... ... 39 2.1 Other scope considerations ... ... ... 40 ... ... ... 42 2.2 Definition of a customer 2.3 Collaborative arrangements ... ... ... 43 2.4 Interaction with other standards ... 44 ... ... 52 3. Identify the contract with the customer ... ... ... ... 3.1 Attributes of a contract 53 3.2 Contract enforceability and termination claus e ... ... 62 3.3 Combining contracts ... ... ... 67 3.4 Contract modifications ... ... ... 69 3.5 Arrangements that do not meet the definition of a contract unde r the standard ... ... ... ... 80 4. Identify the performance obligations in the contract ... ... 83 4.1 Identifying the promised goods or services in the contract ... 83 ... 4.2 Determining when promises are performance obligations 94 4.3 Promised goods or services that are not distinct ... 118 ... ... 119 4.4 Principal versus agent considerations ... ... 135 . 4.5 Consignment arrangements ... onal goods or services ... .. 135 4.6 Customer options for additi ... ... 149 4.7 Sale of products with a right of return 5. Determine the transaction price ... ... 151 ... 5.1 Presentation of sales (and other similar) taxes ... ... 153 ... ... ... 5.2 Variable consideration 154 5.3 Refund liabilities ... ... ... 172 5.4 Rights of return ... ... ... 173 5.5 Significant financing component ... 178 ... - ... ... ... 193 5.6 Non cash consideration ... ... 5.7 Consideration paid or payable to a customer 196 5.8 Non - refundable upfront fees ... ... 204 5.9 Changes in the transaction price ... ... 208 6. Allocate the transaction price to the performance obligations ... 209 6.1 Determining stand - ... ... 209 alone selling prices 6.2 App lying the relative stand - alone selling price method ... 225 6.3 Allocating variable consideration ... ... 228 ... ... 233 ... 6.4 Allocating a discount Updated October 2018 4 A closer look at IFRS 15, the revenue recognition standard

5 6.5 Changes in transaction price after contract inception 237 ... nts outside the scope of 6.6 Allocation of transaction price to compone ... ... ... ... 238 IFRS 1 ... ... 240 7. Satisfaction of performance obligations ... ... 241 7.1 Performance obligations satisfied over time ... 275 ... 7.2 Control transferred at a point in time ents ... ... ... 282 7.3 Repurchase agreem ... ... . 289 7.4 Consignment arrangements ... - and - hold arrangeme nts 290 ... .. 7.5 Bill 7.6 Recognising revenue for licences of intellectual property 294 ... .. 294 7.7 Recognising revenue when a right of return exists ... tions for additional goods or 7.8 Recognising revenue for customer op ... ... ... ... 294 services 7.9 Breakage and prepayments for future goods or services ... 295 8. Licences of intellectual property ... ... ... 29 9 8.1 Identifying performance obligations in a licensing arrangement ... 300 8.2 Determining the nature of the entity’s promise in granting a licence ... 307 ... 313 8.3 Transfer of control of licensed intellectual property 8.4 Licence renewals ... ... ... 318 - - based royalties on licences of intellectual based or usage 8.5 Sales property ... ... ... 319 ... ... 332 9. Other measurement and recognition topics ... ... ... ... 9.1 Warranties 332 9.2 Onerous contracts ... ... ... 339 9.3 Contract costs ... ... ... 341 10. Presentation and disclosure ... ... ... 367 10.1 Presentation requirements for contract assets and contract liabilities ... 368 10.2 Other presen tation considerations ... ... 376 10.3 Disclosure objective and general requirements ... ... 377 10.4 Specific disclosure requirements ... 378 ... ... 394 10.5 Transition disclosure requirements ... ... ... 10.6 Disclosures in interim financial statements 395 Appendix A: Extract from EY’s IFRS Disclosure Checklist ... ... 396 Appendix B: Illustrative examples inc luded in the standard and references in this publication ... ... ... ... 405 Appendix C: TRG discussions and references in this publication ... 409 Appendix D: Defined terms ... ... ... 412 Appendix E: Changes to the standard since issuance ... ... 413 Appendix F: Summary of important changes to this publication ... 414 ... ... differences from US GAAP 421 Appendix G: Summary of A closer look at IFRS 15, the revenue recognition standard Updated October 2018 5

6 What you need to know IFRS 15 creates a single source of revenue requirements for all entities • It represents a significant change from legacy IFRS. in all industries. • IFRS 15 applies to revenue from contracts with customers and replace d all of the revenue standards and interpretations in IFRS, including legacy IAS Customer Construction Contracts , IAS 18 Revenue , IFRIC 13 11 Agreements for the Construction of Real Loyalty Programmes , IFRIC 15 , IFRIC 18 Revenue 31 and SIC - Estate Transfers of Assets from Customers Barter Transaction involving Advertising Services . – IFRS 15 is principles - • based, consistent with legacy revenue req uirements, but provides more application guidance. The lack of bright lines requires increased judgement. may The standard may have ha d • little effect on some entities, but require significant changes for others, especially those entities for which legacy little application guidance. I FRS provide d • IFRS 15 also specifies the accounting treatment for certain items not typically thought of as revenue, such as certain costs associated with obtaining and fulfilling a contract and the sale of certain non financial - assets. Updated October 2018 6 A closer look at IFRS 15, the revenue recognition standard

7 Objective , e ffective date and transition 1. 1.1 Overview of the standard The revenue standards the Boards issued in May 2014 were large ly converged. IFRS 15 and the FASB’s standard supersede virtually all legacy revenue recognition requirements in IFRS and US GAAP, respectively. Noting several concerns with previous IFRS requirements for revenue recognition under both and Boards ’ goal in joint deliberations was to develop revenue US GAAP, the 4 standards that: • Remove inconsistencies and weaknesses in the legacy revenue recognition literature • Provide a more robust framework for addressing revenue recognition issues Improve comparability o f revenue recognition practices across industries, • entities within those industries, jurisdictions and capital markets • Reduce the complexity of applying revenue recognition requirements by reducing the volume of the relevant standards and interpretations P rovide more useful information to users through expanded disclosure • requirements for all revenue arising from The standards provide accounting requirements contracts with customers. They affect all entities that enter into contracts to provide goods or ser vices to their customers, unless the contracts are in the scope of other IFRSs or US GAAP requirements , such as the leasing standards . The standard s also specify the accounting for costs an entity incurs to obtain 9.3) and fulfil a contract to provide goods or services to customers (see s ection provide a model for the measurement and recognition of gains and losses and - on the sale of certain non financial assets, such as property, plant or equipment (see section 2.1.1) . IFRS 15 replace s all of the legacy revenue standards and interpretations in IFRS, including IAS 11 , IAS 18 , Construction Contracts Revenue IFRIC 13 , IFRIC 15 Customer Loyalty Programmes Agreements for the , IFRIC 18 Transfers of Assets from Customers Construction of Real Estate 5 31 and SIC - . Barter Transactions Involving Advertising Services – Revenue When they were issued in 201 4 , the standards were converged, except for 6 a handful of differences. Since then, the Boards have issued some converged amendments to their standards, but they ha ve also issued different amendments to the same topics Appendix E for a discussion of the changes to the (see standards since issuance) . The FASB has also issued several amendments that W e highlight the significant differences betw een the the IASB has not issued. throughout this publication. IASB’s final standard and the FASB’s final standard However, the primary purpose of this publication is to highlight the IASB’s 4 IFRS 15.IN5. 5 IFRS 15.IN3, C10. 6 As originally issued, the standards under IFRS and US GAAP were identical except for these areas: (1) the Boards used the term ‘probable’ to describe the level of confidence needed when assessing collectability to identify contracts with customers, which w ill result in a higher threshold under US GAAP than under IFRS; (2) the FASB required more interim disclosures than the IASB; (3) the IASB allowed early adoption and the FASB did not; (4) the IASB allowed - ; and (5) the FASB provided relief for non reversals of impairment losses and the FASB did not public entities relating to specific disclosure requirements and the effective date. A closer look at IFRS 15, the revenue recognition standard 7 Updated October 2018

8 standard, including all amendments to date, and focus on the effects for 7 . As such, we generally refer to the singular ‘standard’ IFRS preparers. 1.1.1 Core principle of the standard The standard describes the principles an entity mu st apply to measure and e revenue and the related cash flows. The core principle is that an recognis e revenue at an amount that reflects the consideration to entity recognis which the entity expects to be entitled in exchange for transferring goods . or services to a customer The principles in IFRS 15 applied using the following five step s: are 1. Identify the contract(s) with a customer 2. Identify the performance obligations in the contract 3. Determine the transaction price Allocate the transaction price to the performance obligations in the 4. contract 5. Recognise revenue when (or as) the entity satisfies a performance obligation E ntit ies need to exercise judgement when considering the terms of the contract(s) and all of the facts and circumstances, including implied contract terms. E ntit ies also have to apply the requirements of the standard c onsistently to contracts with similar characteristics and in similar To assist entities, IFRS 15 includes detailed application circumstances. more than 60 illustrative examples . The IASB also included in IFRS 15 . guidance d a list of these exampl es in Appendix B to this publication We include and provide references to where certain examples are included in this publication . d 1. 2 Effective date IFRS 15 became effective for annual reporting periods beginning on or after 1 January 2018 . E arly adoption was permitted , provided that fact was disclosed . 7 For more information on the effect of the new revenue standard for US GAAP preparers, refer to our Financial Reporting Develop ments: Revenue from contracts with customers EY AccountingLink , available on 7 201 . (ASC 606) , Revised April Updated October 2018 8 A closer look at IFRS 15, the revenue recognition standard

9 The table below 15 for entities with illustrates the effective date of IFRS differing year - ends and assumes that entities report results twice a year (annual - year). and half Mandatory - Year adoption Early adoption end 31 December 1 January 2018 Possible adoption dates , but include are not limited to : adoption date. 1 January 2014 adoption date. • Present for the first Present for the first time in June time in 30 30 June 2014 interim financial interim 2018 statements and in 31 December financial statements 2014 annual financial statements. and in 1 January 2015 adoption date. • December 31 2018 Present for the first time in annual financial 30 June 2015 interim financial statements . 31 and in statements December 2015 annual financial statements. • 1 January 2016 adoption date. Present for the first time in 30 June 2016 interim financial statements and in 31 December 2016 annual financial statements . • 1 January 2017 adoption date. Present for the first time in June 2017 interim financial 30 31 December statements and in 2017 annual financial statements. 2018 1 July include , but Possible adoption dates 30 June date. adoption : are not limited to Present for date. adoption 1 July 2014 • the first time in Present for the first time in 31 December 2018 31 December 2014 interim interim financial and in financial statements and in statements 30 June 2015 annual financial 2019 30 June . statements annual financial • 1 July 2015 adoption date. statements . Present for the first time in 31 December 2015 interim financial statements and in nnual financial June 2016 a 30 statements . adoption 1 July 2016 • date. Present for the first time in 31 December 2016 interim financial statements and in 30 June 2017 annual financial statements . • 1 July 2017 adoption date. Present for the first time in int erim 31 December 2017 financial statements and in 30 June 2018 annual financial statements. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 9

10 FASB differences 8 effective for public entities, as defined, for T became he FASB’s standard fiscal years beginning after 15 December 2017 and for interim periods - public entities (i.e., an entity that does not meet the definition therein. Non of a public entity in the FASB’s standard) are required to adopt the standard ning after 15 December 2018 and interim periods within for fiscal years begin - public entities fiscal years beginning after 15 December 2019. That is, non are not required to apply the standard in interim periods in the year of adoption. ublic and non - public entities wer e permitted to adopt the standard US GAAP p . as early as the original public entity effective date 3 Transition methods (updated October 2018) 1. IFRS 15 However, the Board decided to allow requires retrospective application. ( either ’ adoption ’ in which the standard is applied to all of the full retrospective periods presented ) or ‘ modified retrospective ’ adoption . See s ection s 1. 3 . 2 and 1. 3 . 3 below, respectively . : The following are the dates relevant to transition reporting period in which • the start of the The – date of initial application 9 IFRS 15 . This date of initial application does not an entity first applies change, regardless of the transition method that is applied. Examples of dates of initial application for different year - ends include: Year ending Date of initial application 31 December 2018 1 January 2018 30 June 2019 1 July 2018 • The – the start of the earliest beginning of the earliest period presented reporting period presented within an entity’s financial statements for the reporting period in which the entity first applies IFRS 15. This is relevant for entities using the full retrospective adoption method. For example : Beginning of the earliest period presented (two comparative (one comparative periods) end Year ing period) 31 December 2018 1 January 2017 1 January 2016 30 June 2019 1 July 2017 1 July 2016 8 The FASB’s standard defines a public entity as one of the following: A public business entity (as defined); A not for - profit entity that has issued, or is a conduit bond obligor for, - securities that are traded, listed or quoted on an exchange or an over - the - counter market; An employee benefit plan that files or furnishes fi nancial statements with the US SEC. An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. The SEC staff said it would not object if these entities adopt the new revenue standard using - public entities rather than the effective date for public entities. the effective date for non 9 IFRS 15.C2(a). Updated October 2018 10 A closer look at IFRS 15, the revenue recognition standard

11 1.3.1 Definition of a completed contract (updated October 2018) fines a completed contract as a contract in which the entity has IFRS 15 de services before the date of initial or fully transferred all of the identified goods 10 Depending on the manner an entity elects to transition to application. 15, an enti t y may not need to apply IFRS 15 to contracts if they have IFRS completed performance before the date of initial application, even if they have not yet received the consideration and that consideration is still subject to variability . The IASB noted in the B asis for Conclusions that ‘transferred all of the goods or services’ is not meant to imply that an entity would apply the ‘transfer of control’ notion in IFRS 15 to goods or services identified in that have been accordance with legacy IFRS . Rather it is performance in accordance with legacy requirements (i.e., IAS 11, IAS 18 and related Interpretations) , as noted in IFRS 15.BC441 . “Consequently , in many situations the term ‘transferred’ would mean ‘delivered’ within the context of contracts for the sale o f goods and ‘performed’ within the context of contracts for rendering services and construction contracts. In some situations, the entity would use judgement when determining whether it has transferred goods or services to the 11 ” . customer Consider the fo llowing examples: Contract is completed — a retailer s old products • to a customer on 31 , with immediate delivery. The customer has a poor December 2017 . Therefore, the retailer require credit history the customer to pay half d of the consideration upfront and half within 60 days . In accordance with IAS 18, the retailer recognise d half of the consid eration at the time of was the sale. However, the retailer c onclu de d it not probable that it would be able to collect the remainder and red recogn ition of this amount. defer re delivered prior to the date of initial application of the goods we Because (e.g., IFRS 15 January 2018) and collectability concerns were only the 1 the contract is reason for delaying recognition of revenue under IAS 18, compl ete d under IFRS 15 (see Question 1 - 5 below) . considered ed not completed — a n entity enter Contract is into a contract to provide • to a customer on 3 1 January 2017. In a service and loyalty points accordance with IFRIC 13, the entity allocated a portion of the total contract consideration to the loyalty points and defer red revenue were exercised on 15 January 2018. The entity recognition until the points d the required service within six months and recognise d complete revenue related to the servi ce over that period in accordance with IAS 18. As at the date of initial application of IFRS 15 (e.g., 1 January 2018), the entity ha not yet performed in relation to the loyalty points. As a result, the d cont ract was not considered complete d under IFRS 15 (see Question 1 - 7 below) . 10 IFRS 15.C2(b). 11 IFRS 15. . BC445D A closer look at IFRS 15, the revenue recognition standard Updated October 2018 11

12 How we see it As discussed above, determining which contracts are completed at transition may require significant judgement, particularly if legacy IFRS did not provide detailed requirements that indicated when goods had been delivered or services performed (e.g., licen ces of intellectual property). Entities should not consider elements of a contract that d id not result in recognition of revenue legacy IFRS (e.g., warranty provisions) under when assessing whether a contract is complete. FASB differences The definition of a ‘completed contract’ is not converged between IFRS and US GAAP. A completed contract under ASC 606 is defined as one for which all (or substantially all) of the revenue was recognised in accordance legacy 12 of initial application . US GAAP requirements that applied at the date The different definitions could lead to entities having a different population of contracts to transition to the revenue standards under IFRS and US GAAP, respectively. However, the Board noted in the Basis for Conclusions that an entity could avoid the consequences of these different definitions by choosing to apply IFRS 15 retrospectively to all contracts, including 13 completed contracts. Frequently asked questions be considered when Question Which elements of a contract must 1: - 1 determining whether a contract meets the definition of a completed contract? An entity must consider all of the elements (or components) in a contract that give rise to revenue in the scope of legacy IFRS. It should not consider the el ements of a contract that do not result in recognition of revenue (e.g., warranty provisions accounted for in accordance with IAS 37 ) when assessing Provisions, Contingent Liabilities and Contingent Assets whether a contract is complete. For example, u nde r legacy IFRS, an entity may have accounted for a financing component (i.e., separating the interest income or expense from the reven the contract into a revenue ue). Doing so effectively split component and a financing component. In our view , the financing component would not be considered in determining whether the goods or services have transferred to the customer (i.e., it would not affect the assessment of whether the contract meets the definition of a completed contract). 12 . - As defined in ASC 606 - 10 - 65 1(c)(2) 13 15.BC445I. IFRS Updated October 2018 12 A closer look at IFRS 15, the revenue recognition standard

13 Frequently asked questions (cont’d) In addition, within the scope of IFRS 15 need are not elements that income not be considered. For example, IAS 18 applied to dividends and provided guidance on the recognition of interest and fees integral to the issuance of a financia l instrument. None of these elements would be considered when determining whether a contract meets the definition of a completed contract for transition to IFRS 15. This is because: 14 • Dividends are n ot within the scope of IFRS 15. The guidance that was prev • iously included in the illustrative examples the issuance of a financial instrument is to IAS 18 for fees integral to 15 now included within IFRS 9 . Financial Instruments Interest income • will continue to be accounted for in accordance with 16 nterest method as set out in IFRS 9. the effective i 1 Do the requirements in IFRS 15 for identifying a contract 2 : Question - (including contract duration) affect the identification of a contract under legacy IFRS? When determining whether a contract is completed, an entity considers In order to determine the requirements of legacy IFRS and not IFRS 15. whether a contract is completed, an entity needs to determine the boundaries the contract , whether it was combined of a contract, including the term of with other contract . That is, an entity must s, whether it was modified, etc identify what is the contract in order to assess if it meets the definition of a completed contract. Considering the requirements of IFRS 15 could lead to different outcomes from legacy IFRS. IFRS 15 provides detailed requirements to assist entities in identifying a contract, including determin ng the contract duration. i These requirements are more detailed than legacy IFRS and could result in outcomes that are different under IFRS 15 (e.g., an entity may conclude a contract is of a shorter duration than the stated term in certain contractual . Refer to section 3.2 for further discussion ). circumstances under IFRS 15 While legacy IFRS did not pr ovide detailed requirements for identifying the contract, accounting policies and an entity’s past practice may be informative in identifying the contract, including determining: (a) what the entity considered the contract to be (e.g., master supply agreem ent or individual purchase orders); and (b) the contract duration (i.e., the stated contractual term or a shorter period). 14 IFRS 9.5.7.1A and IFRS.9.5.7.6. 15 IFRS 9.B5.4.1 - B5.4.3. 16 B5.4.7. - IFRS 9 Appendix A, IFRS 9.5.4.1, IFRS 9.B5.4.1 A closer look at IFRS 15, the revenue recognition standard Updated October 2018 13

14 Frequently asked questions (cont’d) Consider the following examples: : — Illustration 1 Definition of completed contract - contract duration 1 Scenario 1 ed into a contract with a customer to On 30 June 2016, Entity A enter was required to pay a fixed provide services for 24 months. The customer ed constant during the contract term monthly fee of CU150, which remain of 24 months, regardless of the time needed to provide the services or the actual usage from the customer each day. The customer could cancel the contract at any time without penalty by giving Entity A one month’s notice. Entity A ha not received any cancellation noti ce up to 1 d January 2017 and, based on past experience, Entity A d id not expect customers to cancel within the first year. For this contract, Entity A concluded that the contract duration under legacy IFRS was the stated contractual term of 24 months. Entit y A’s accounting policy for these types of contracts under IAS 18 state d that revenues from providing monthly services to customers were recognised over the service period, on a monthly basis. While not explicitly stated in its accounting policy, Entity A ha d typically treated the stated contractual term as the duration of the contract (unless the customer was or the contract cance modified), being the period over which the ed l l contractual rights and obligations were enforceable. Assume that Entity A adopts IFRS 15 on 1 January 2018 using the full retrospective method. Entity A also uses the practical expedient in IFRS 15.C5(a)(ii) not to restate contracts that meet the definition of , a completed contract f as defined in IFRS 15.C2(b) at the beginning o th e earliest period presented (i.e., 1 January 2017; Entity A presents one comparative period only). Under IFRS 15, Entity A is likely to conclude that the contract is a month - to month contract. However, when determining whether the contract is - completed, E ntity A only considers legacy IFRS. Entity A might have noted that its accounting policy under IAS 18 did not focus on the identification of contract duration and, therefore, perhaps the contract is neither a 24 - month contract nor a month - to - month contract . Entity A ha d accounted for this type of service contract based on monthly invoicing and, arguably, that accounting treatment is similar to the accounting treatment of - a month month contract. However, while not explicitly stated, Entity A - to generally viewed the stated contractual term as the period over which has the rights and obligations are enforceable. Updated October 2018 14 A closer look at IFRS 15, the revenue recognition standard

15 Frequently asked questions (cont’d) contract duration — Definition of completed contract: 1 Illustration 1 - (cont’d) Entity A cannot cancel the contract with the customer and Furthermore, is obliged to render services for the entire contract period of 24 months, unless a termination notice is provided by the customer which would limit Entity A’s obligation to provide services for th e next 30 days from the notification date. Since no cancellation notice ha been submitted by d the customer at least one month before 1 January 2017, approximately 18 months of services still need to be provided as at the beginning of the earliest period presented (i.e., 1 January 2017). Therefore, Entity A concludes that the contract does not meet the definition of a completed contract and would need to be transitioned to IFRS 15. Scenario 2 as Assume the same facts Scenario 1, with the exception that the customer submitted an early termination notice on 30 November 2016. Similar to Scenario 1, the contract duration under legacy IFRS would have been the stated contractual term of 24 months. However, in this scenario, the customer has submitted the termination notic e on 30 November 2016. T herefore, Entity A concludes that the term of the contract ceases on 31 December 2016. Entity A cannot cancel the contract with the customer and is obliged to render services for th e entire contract period of 24 months, unless a termination notice is provided by the customer which limits Entity A’s obligation to provide service for the next 30 days from the notification mber 2016, provided all services prior to 31 Dece d date. Since Entity A ha Entity A concludes that the contract is a completed contract. Entity A continue apply its legacy accounting policy (developed in accordance s to with IAS 18) to any remaining consideration still to be recognised. Scenario 3 Assume the same facts with Scenario 1, with the exception that the refundable upfront fee of CU50 customer required to pay a non - was at commencement of the contract (in addition to the monthly fixed fee). The customer can cancel the contract at any time without penalty, but ithout having to provide any notice. The customer cancel w led the contract on 30 November 2016. In its financial statements, Entity A’s accounting policy for these types of contracts under IAS 18 state that revenues from non - refundable upfront d fees were def erred over the average customer retention period. T he customer retention period was estimated to be two years. Therefore, was - line basis he deferred revenue t recognised as revenue on a straight over the next 24 months. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 15

16 Frequently asked questions (cont’d) - 1 Illustration 1 Definition of completed contract: contract duration — (cont’d) Similar to Scenario 2, the contract duration under legacy IFRS would have been the stated contractual term of 24 months. However, the customer d submitted the termination notice on 30 November 2016 and, ha therefore, Entity A concludes that the term of the contract ceases on 31 December 2016. Entity A’s legacy accounting policy for the non - refundable upfront fee refers to recognition of the deferred income over average customer retention period, not the contractual term. The definition of a completed contract is not dependent on all revenue being recognised, but rather on all goods and services being transferred to the customer. Furthermore, t he peri od over which revenue is recognised does not affect the contract duration. As such, recognition of this upfront fee is not relevant in determining whether the contract is a completed contract. All previously contracted services ha d been provided to the cus tomer up to the date of cancellation. Therefore, the contract is a completed contract. Entity A continue s applying its legacy accounting policy (developed to any remaining consideration still to be ) in accordance with IAS 18 t the customer has terminated the contract recognised. However, given tha early, Entity A need s to reassess, in line with the requirements of IAS 18, - the period over which this remaining revenue arising from the non refundable upfront fee would be recognised. Question 1 - 3: When determining whether an entity has ‘transferred all goods or services’, does it consider the requirements of IFRS 15 for ‘transfer of control’? No. The IASB noted in the Basis for Conclusions that ‘transferred all of meant to imply that an entity would apply the the goods or services’ is not ‘transfer of control’ notion in IFRS 15 to goods or services that have been identified in accordance with legacy IFRS. Rather , an entity is re quired to determine whether it has transferred all the goods or serv ices in accordance with the requirements in legacy IFRS, as noted in IFRS 15.BC441 (see Question 1 - 4 below) . “Consequently, in many situations the term ‘transferred’ would mean ‘delivered’ within the context of contracts for the sale of goods and d’ within the context of contracts for rendering services and ‘performe construction contracts. In some situations, the entity would use judgement when determining whether it has transferred goods or services to the 17 customer”. 17 IFRS 15.BC445D. Updated October 2018 16 A closer look at IFRS 15, the revenue recognition standard

17 Frequently asked questions (cont’d) 4: If some or all of revenue has not been recognised under - Question 1 legacy IFRS, would that prevent the contract from being completed? Possibly. The definition of a completed contract is not dependent on an entity However, the requirements in legacy having recognised all related revenue. IFRS with respect to the timing of recognition may provide an indication of whether the goods or services have been transferred. , all of which needed to be satisfied IAS 18 provided the following five criteria 18 in order t o recognise revenue from the sale of goods: The entity had transferred to the buyer the significant risks and rewa • rds of ownership of the goods . • The entity retained neither continuing managerial involvement to the with ownership nor effective control over degree usually associated the goods sold . . The amount of revenue could be measured reliably • • It was probable that the economic benefits associated with the transaction would flow to the entity . • The costs incurred or to be incurred in respec t of the transaction could be measured reliably . IAS 18 viewed the passing of risks and rewards as the most crucial of the five criteria, giving the following four examples of situations in which an entity 19 ds of ownership: may have retained the significant risks and rewar • When the entity retained an obligation for unsatisfactory performance not covered by normal warranty provisions . When the receipt of the revenue from a particular sale was contingent • on the derivation of revenue the buyer from its sale . of the goods • When the goods were shipped subject to installation and the installation was a significant part of the contract which had not yet been completed by the entity . • When the buyer had the right to rescind the purchase for a reason specified in the sales contract and the entity was uncertain about the probability of return. the Understanding the reasons for accounting treatment under legacy IFRS may, therefore, assist entities in determining whether the goods or services have been transferred and th e completed contract definition has been met. However, j in respect of some goods or services. udgement may be needed Assume, for example, that an entity sells products, but cannot recognise revenue immediately. The delayed recognition of revenue may be bec ause of factors related to the timing of transfer, such as a bill and - hold arrangement , - or because the goods or services have been transferred, but not all of the criteria for recognition have been met. 18 IAS 18.14. 19 IAS 18.16. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 17

18 Frequently asked questions (cont’d) 5: - Question 1 If collectability concerns delayed recognition of revenue under legacy IFRS, would that prevent the contract from being completed? If collectability concerns were the only reason for delaying recognition of revenue under legacy IFRS (i.e., because it was not probable that the economic benefits associated with the transaction would flow to the entity), it would not prevent a contract from meeting the definition of a completed contract. However, it is important to ensure that this is the only reason for the delay in recognition. Consider the following examples: - 2 — Definition of completed contract: collectability Illustration 1 Scenario 1 ntity A ente red In November 2016, E to into a contract with a customer immediate delivery. Because of the customer ’s deliver 1,000 products with agree d poor credit history, Entity A that the customer could pay for 60% of the products on the date of delivery and the remai ning 40% within delivery date. Under its previous accounting policy (in 60 days of the accordance IAS 18.14), Entity A only recognise d revenue for 60% with of the consideration and defer red recognition of the remaining 40% until it proba ble that this amount would was be collected (provided the other criteria in IAS 18.14 were met). Collectability of the remaining 40% of the consideration became probable at the end of January 2017. A adopted IF RS 15 on 1 January 2018 and used Assume that Entity the full retrospective method to t ransition. Entity A also uses the practical dient in IFRS 15.C5(a)(ii) not to restate contracts that meet the expe definition of a completed contract as defined in IFRS 15 .C2(b) at the beginning of the earliest period presented. At the beginning of the earliest period presented (i.e., 1 January 2017 ; Ent ity A presents one comparative period only ), Entity A ha d transferred all goods identified in the contract by delivering 1,000 products to t he customer and had recognised 60% of the revenue. Although Entity A could only partially recognise the revenue from the sale of the 1,000 products (because it was not probable whether it would collect 40% of the consideration), this does not affect the determination of whether the were identified goods transferred to the custo mer. Therefore, Entity A to account for consider the contract as completed. Entity A continue s s the contract in accordance with its legacy a ccounting policy (developed in accordance with IAS 18). Scenario 2 In January 2016, Entity A ente red into a contrac t with a customer to construct a highly specialised system on the customer’s premises that was expected to be c ompleted within 11 months. The consideration of CU100,000 took into account the particularities of the customer’s specific premises. The repayment schedule correspond ed to the performance completed to date and Entity A applie d the percentage of completion e , recognising revenue in th IAS 11.25 method in accordance with re rendered. in which the relevant services we accounting period Updated October 2018 18 A closer look at IFRS 15, the revenue recognition standard

19 Frequently asked questions (cont’d) - 2 Illustration 1 Definition of completed contract: collectability — (cont’d) d collected Upon completion of the highly specialised system, Entity A ha the consideration of CU100,000 and recognised an equal amount as revenue. However, in October 2016, while executing the construction ts to adjust the initial activities, Entity A incurred unexpected additional cos of the highly specialised system due to certain changes in the design contract customer’s premises that had not been communicated at inception. Entity A filed a claim for these unexpected costs, requesting an on 00. The c struction was completed increase in the consideration of CU1,0 in Nov ember 2016. In February 2017, Entity A agreed with its customer to settle the claim at an amount of CU500 to be paid within three months. Assume that Entity A adopted IF RS 15 on 1 January 2018 and used the full retrospective method t o transition. Entity A also used the practical expedient in IFRS 15.C5(a)(ii) not to restate contracts that meet the definition of a completed contract as defined in IFRS 15.C2(b) at the beg inning of the earliest period presented. At the beginning of the earliest period presente d (i.e. , 1 January 2017), Entity A ha d transferred all goods and services identified in the contract by completing the construction and delivering the highly specialised system d bmitted a claim for additional to the customer. The fact that Entity B ha su consideration for the identified goods and services that ha d a lready been transferred to the customer is not relevant when determining whether the identifi ed goods or services have been transferred. Therefore, Entity A considers the contract as completed. Entity A continue s to account for the contract in accordance wit (developed in h its legacy accounting policy accordance with IAS 11). Question 1 - 6: When does legacy IFRS consider licences to be transferred? Legacy IFRS provides limited guidance to assist entities in determining when a licence of intellectual property is transferred (i.e., when the significant risks and rewards of ownership of the licence to the customer in transfer accordance with IAS 18.14( a)). Therefore, entities will need to use significant judgement to determine whether a contract involving the licence o f intellectual property meets the definition of a completed contract. IAS 18.33 state that "royalties accrue in accordance with the terms of the d relevant agreement and are usually recognised on that basis unless, having regard to the substance of the agreement, it is more appropriate to recognise revenue on some other systematic and ration al basis”. IAS 18.IE20 states that “fees and royalties paid for the use of an entity’s assets (such as trademarks, patents, software, music copyright, record masters and motion picture films) are normally recognised in accordance with the substance of agreement. As a practical matter, this may be on a straight the line basis over - the life of the agreement, for example, when a licensee has the right to use certain technology for a specified period of time ... In some cases, whether or lty will be received is contingent on the occurrence of not a licence fee or roya A closer look at IFRS 15, the revenue recognition standard Updated October 2018 19

20 (cont’d) Frequently asked questions a future event. In such cases, revenue is recognised only when it is probable that the fee or royalty will be received, which is normally when the event has occurred.” Since the guidance provided in this paragraph and the illustrative examples to ed IAS 18 focus on the recognition of revenue, it may be difficul t to determine when the entity transferred the significant risks and rewards of ownership to the custo mer. If an entity has recognised revenue over time under legacy IFRS, it needs to carefully assess the reason for this treatment. ongoing It may be helpful to assess whether or not there are remaining or obligations related to the licence, as discussed in IAS 18.IE20: If the licence of intellectual property is an in - substance sale and there • were it is likely that no remaining obligations to perform, the significant risks and rewards of ownership will have transferred to the customer at the time of sale. As discussed in IAS 18.IE20: “An assignment of rights for a fixed fee - cancellable contract which or non - refundable guarantee under a non permits the licensee to exploit those rights freely and the licensor has tance, a sale. An example no remaining obligations to perform is, in subs is a licensing agreement for the use of software when the licensor has no obligations subsequent to delivery. Another example is the granting of rights to exhibit a motion picture film in markets where the licensor has no contr ol over the distributor and expects to receive no further revenues from the box office receipts. In such cases, revenue is recognised at the time of sale.” use judgement to determine In all other instances, an entity needs to • e when the licensee can exploit rights under the licen c the freely and the licensor has no remaining obligations to perform. This may be helpful in understanding whether the ongoing obligations mean that the significant risks and rewards of ownership did not pass at a single point in time, but over a period of time. Furthermore, this assessment could help in determining whether it is over the entire licence period or a shorter period and might include considering factors such as: • The reason that the contract is cancellable (if applicable) The nature of any restrictions over use of the • intellectual property . For example , whether it is a characteristic of the licence itself (e.g., the countries covered by the licence) or restricts the licensor’s ability to use the rights received (e.g., the licensor cannot use the intellectual property before a specified date) which The nature of any remaining obligations and the period in /over • those obligations apply Updated October 2018 20 A closer look at IFRS 15, the revenue recognition standard

21 Frequently asked questions (cont’d) Consider the following examples: Definition of completed contract: licences Illustration 1 - 3 — Scenario 1 ed into a three - year contract that On 1 January 2016, Entity A enter ed rights to exhibit a film at cinemas and allow ed for multiple grant r a non - refundable upfront fee of showings within a specific period fo was was the only activity that Entity A CU 9,000. The delivery of the film obliged to perform in the contract and there no further involvement was was or other obligations for Entity A. The film the customer delivered to on 1 January 2016 and Entitly A concluded that the significant risks and rewards of ownership has been transferred on that date. Entity A’s legacy IFRS accounting policy for this type of contracts state d that was recognised in full upon commenceme nt of the licence revenue period, because that was the first point at which the customer ha d the risks and reward s of ownership and all the criteria for revenue re cognition we re met at that date. Assume that Entity A adopted IF RS 15 on 1 January 2018 and used the full retrospective method t o transition. Entity A also used the practical expedient in IFRS 15.C5(a)(ii) not to restate contracts that meet the definition of a completed contract as defined in IFRS 15.C2(b) at the beginning . of the earliest period presented acco unting policy, revenue was According to Entity A’s previous recognised in full upon commencement of the licence period (i.e., on Entity A ha d 1 January 2016) no further involvement beyond that and point. Therefore, at the beginning of the earliest p eriod presented (i.e. , 1 January 2017), the contract is completed. Entity A continue s to account for the contract in accordance with its legacy accounting policy (developed in accordance with IAS 18). Scenario 2 he exception that the fee Assume the same facts as Scenario 1, with t contingent up on the occurrence of a future event, specifically the was was based on a percentage of the box office receipts during purchase price the con tract term (i.e., three years). Entity A concluded that the significant risks and rewards of ownership transferred to the customer on 1 January 2016, when the film was delivered. The existence of a sales - based royalty earned over a two - year period does not affect the timing of transfer to the customer bec ause Entity A ha d no further obligations to perform. The licence fee is contingent on box office “revenue is recognised only stated IAS 18.IE20 receipts. In such cases, when it is probable that the fee or royalty will be received, which is e event has occurred.” normally when th A closer look at IFRS 15, the revenue recognition standard Updated October 2018 21

22 Frequently asked questions (cont’d) Definition of completed contract: licences (cont’d) 3 Illustration 1 - — However, this does not give rise to an additional obligation for Entity A. Therefore, it does not affect the timing of transfer to the customer. Therefore, at the beginning of the earliest period presented continue 1 January 2017), the contr act is completed. Entity A (i.e., s to account for the contract in accordance with its legacy accounting policy e with IAS 18). (developed in accordanc Scenario 3 Assume the same facts with Scenario 1, with the exception that, along ed the promotion of the films with the delivery of the film, Entity A support through promotional and marketing campaigns for a period of 18 months was delivered to the customer. after the film Entity A’s legacy IFRS accounting policy for this type of contracts state d t campa igns are not separately identifiable hat “promotional and marketing components in a contract in which it grants rights to exhibit and broadcast films. Revenue is recognised as the promotion al and marketing campaigns are performed on a straight - line basis over the period of the licence.” that, while the film was delivered on 1 January 2016, Entity A concluded risks and the significant rewards of ownership of the deliverable (i.e., the film and services, together) did not transfer to the customer until the June 2017). services were provided (i.e., 30 d multiple components because Entity A ha d The contract include to provide pro motional support services in addition to the delivery of the licence. However, Entity A ha d considered IAS 18.13 and determined ponents to which that these services were not separatel y identifiable com be allocated. Instead, revenue recognised for both was revenue need ed to the lice services during the licence period, nce and the promotional support as Entity A provide d the services. The contract is not considered comple ted because Entity A has to transfer additional services after transferring the right to exhibit the film. The fact that Entity A ha consideration to each d not separately allocated the component in the contract does not relieve it from its obligations to u ndertake the promotional activities over the following 18 months. Therefore, at the beginning of the earliest period presented (i.e., form and provide the January 2017), Entity A still ha d to per 1 up to 30 June promotional support services to the customer remaining 2017. Accordingly, the contract does not meet the definition of a tract needs to be transitioned to IFRS 15. completed contract. The con Updated October 2018 22 A closer look at IFRS 15, the revenue recognition standard

23 Frequently asked questions (cont’d) - 7: IFRS consider loyalty points to be Question 1 When does legacy transferred? ‘ transferred ’ loyalty points Under legacy IFRS, an entity would not have were redeemed or granted to a customer until the points expired. Entities will need to carefully assess their loyalty programmes as points arose from several contracts with the same customer(s). Since typically d IFRIC 13 require that such programmes be treated as a revenue element in a contract rather than a cost accrual, a contract would not be considered complete until the loyalty points arising from th at contract have been redeemed or have expired. Entities that operate loyalty programmes may face practical challenges in determining which contracts gave rise to unexpired and unused loyalty and must be points and, therefore, which contracts are not yet completed ( transitioned to IFRS 15). Some entities may have data within their systems that assist them in identifying those contracts for each customer. However, if an entity has not specifically tracked such information by customer, the terms and condi tions of the loyalty programme may assist entities in understanding whether/when points expire in order to identify the likely timing of the original transaction that gave rise to the point(s). Furthermore, it may help to understand whether the entity use d a first - in - first - out approach to the utilisation of loyalty points or some other approach. Consider the following examples: Illustration 1 Definition of completed contract: loyalty 4 — - programmes Entity n enter into ustomers ca sells goods to retail customers. The c A a loyalty programme such that when they purchase goods, they receive on goods purchased from Entity A . 1 loyalty point for every CU100 spent Customers can redeem their accumulated loyalty points for discounts on future purchases from Entity A . When redeemed, 1 point entitles the customer to a CU1 discount , which is assumed to be the fair value of each loyalty poin year s from the award day. t. Points awarded expire in two Entity A recognises revenue from sales of goods whe n customers buy A them at the point of sale. According to IFRIC 13, Entity allocate d the fair value of receivable in respect of the initial the consideration received or sale between the award points and the initial good sold. On 1 November 2016, Entity sold CU10,000 worth of goods and granted A 100 loyalty points to a customer. Using a relative fair value approach, Entity A allocated CU9,901 to the sale of goods and CU99 to the loyalty points. evenue from the sale of goods was recognised immediately. The r However, revenue r ecognition for the loyalty points was deferred until the points were exercised or expired. On 1 January 2017, the customer had not used the points. IFRS 15 on 1 January 2018 and uses the Assume that Entity A adopted also uses the practical full retrospective approach to transition. Entity A expedient in IFRS 15.C5(a)(ii) not to restate contracts that meet the definition of a completed contract as defined in IFRS 15.C2(b) at the A closer look at IFRS 15, the revenue recognition standard Updated October 2018 23

24 Frequently asked questions (cont’d) Illustration 1 4 — Definition of completed contract: loyalty - programmes (cont’d) beginning earliest period presented (i.e., 1 January 2017 ; Entity A of the presents one comparative period only ) . As at the beginning of the earliest period presented, Entity A concludes that the loyalty points have not yet been exercised or expired. At the beginning of the earliest period presented (i.e., 1 January 2017), Entity A had delivered the goods to the customer t hat triggered the award of the unredeemed loyalty points. However, at that date, Entity A ha d not yet performed in relation to the loyalty points that represent ed a separately identifiable component of the initial sale transactions in which they were granted. Therefore, the contract does not meet the definition of a completed contract. The contract needs to be transitioned to IFRS 15. Full retrospective adoption 1. 3 . 2 2018) (updated October Entities electing the full retrospective adoption must apply the provisions of 15 IFRS , in accordance to each period presented in the financial statements with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors , subject to the practical expedients created to provide relief, as discussed belo . w Extract from IAS 8 Applying changes in accounting policies 19. Subject to paragraph 23: (a) a entity shall account for a change in accounting policy resulting from n the initial application of an IFRS in accordance with the specific transitional provisions, if any, in that IFRS; and (b) hen an entity changes an accounting policy upon initial application of w an IFRS that does not include specific transitional provisions applying to that change, or changes an accounting policy voluntarily, it shall apply the change retrospectively. 20. For the purpose of this Standard, early application of an IFRS is not a vo lunta ry change in accounting policy. 21. In the absence of an IFRS that specifically applies to a transaction, other event or condition, management may, in accordance with paragraph 12, er apply an accounting policy from the most recent pronouncements of oth setting bodies that use a similar conceptual framework to develop standard - accounting standards. If, following an amendment of such a pronouncement, the entity chooses to change an accounting policy, that change is accounted accounting policy. tary change in for and disclosed as a volun Updated October 2018 24 A closer look at IFRS 15, the revenue recognition standard

25 Extract from IAS 8 (cont’d) Retrospective application 22. Subject to paragraph 23, when a change in accounting policy is applied retrospectively in accordance with paragraph 19(a) or (b), the entity shall adjust the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied. Limitations on retrospective application 23. When retrospective application is required by paragraph 19(a) or (b), a change in accounting policy shall be applied retrospectively except to the - specific effects extent that it is impracticable to determine either the period or the cu mulative effect of the change. 24. When it is impracticable to determine the period - specific effects of changing an accounting policy on comparative information for one or more prior periods presented, the entity shall apply the new accounting policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable, which may be the current period, and shall make a corresponding adjustment to the component of equity for that period. opening balance of each affected 25. When it is impracticable to determine the cumulative effect, at the beginning of the current period, of applying a new accounting policy to all prior periods, the entity shall adjust the comparative information to apply the new accounting policy prospectively from the earliest date practicable. 26. When an entity applies a new accounting policy retrospectively, it applies the new accounting policy to comparative information for prior periods as far back as is prac ticable. Retrospective application to a prior period is not practicable unless it is practicable to determine the cumulative effect on the amounts in both the opening and closing statements of financial position for that period. The amount of the resultin g adjustment relating to periods before those presented in the financial statements is made to the opening balance of each affected component of equity of the earliest prior period presented. Usually the adjustment is made to retained earnings. However, e adjustment may be made to another component of equity (for example, th to comply with an IFRS). Any other information about prior periods, such as historical summaries of financial data, is also adjusted as far back as is practicable. 27. When it is imprac ticable for an entity to apply a new accounting policy retrospectively, because it cannot determine the cumulative effect of applying the policy to all prior periods, the entity, in accordance with paragraph 25, applies the new policy prospectively from th e start of the earliest period practicable. It therefore disregards the portion of the cumulative adjustment to assets, liabilities and equity arising before that date. Changing an accounting policy is permitted even if it is impracticable to 53 provide icy prospectively for any prior period. Paragraphs 50 – apply the pol guidance on when it is impracticable to apply a new accounting policy to one or more prior periods. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 25

26 Under the full retrospective entities have to apply IFRS 15 as if it , method applied since the inception of all its contracts with customers that had been . That is, an entity electing the full are presented in the financial statements s to transition all of its contracts with customers retrospective method ha to IFRS 15 (subject to the practical expedients described below), not just contracts those that are not considered completed as at the beginning of the earliest period presented. This means that for contracts that were considered completed (as defined) b efore the beginning of the earliest period, an entity still need s to evaluate the contract under IFRS 15 in order to determine whether there was an effect on revenue in any of the years presented in the recognised period of initial application (unless an entity elects to use one of the practical expedients described below) . seemed to prefer the full During deliberations on the original standard , the IASB , s ed under which all contracts with customers are recogni retrospective method in all periods presented within the financial and measured consistently statements, regardless of when the contracts were entered into. This method also provides users of the financial statements with useful trend information across all periods presented. y ential burden of a pplying it on a full retrospective However, to ease the pot basis IASB provided the following practical expedients : , the Extract from IFRS 15 C3. An entity shall apply this Standard using one of the following two methods: to each prior reporting period presented in accordance (a) r etrospectively with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors , subject to the expedients in paragraph C5; or ... C5. An entity may use one or more of the following practical expedients when applying this Standard retrospectively in accordance with paragraph C3(a): (a) f or completed contracts, an entity need not restate contracts that : (i) b egin and end within the same annual reporting period; or (ii) a re completed contracts at the beginning of the earlie st period presented. f or completed contracts that have variable consideration, an entity may (b) use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods. Updated October 2018 26 A closer look at IFRS 15, the revenue recognition standard

27 Extract from IFRS 15 (cont’d) f or contracts that were modified before the beginning of the earliest (c) period presented, an entity need not retrospectively restate the contract 20 - for those contract modifications in accordance with paragraphs 21. entity shall reflect the aggregate effect of all of the Instead, an modifications that occur before the beginning of the earliest period presented when: dentifying the satisfied and unsatisfied performance obligations; i (i) d etermining the transaction price; and (ii) a (iii) llocating the transaction price to the satisfied and unsatisfied performance obligations. (d) or all reporting periods presented before the date of initial application, f an entity need not disclose the amount of the transaction price allocated to the remainin g performance obligations and an explanation of when the 120). entity expects to recognise that amount as revenue (see paragraph C6. For any of the practical expedients in paragraph C5 that an entity uses, the entity shall apply that expedient consistently to all contracts within all reporting periods presented. In addition, the entity shall disclose all of the following information: (a) t he expedients that have been used; and (b) t o the extent reasonably possible, a qualitative assessment of the estimated effect of applying each of those expedients. While the practical expedients provide some relief, an entity still need s s to use to use judgement and make estimates. For example, an entity need judgement in estimating stand - n a wide alone selling prices when there has bee range of selling prices and when allocating the transaction price to satisfied and unsatisfied performance obligations if there have been several performance obligations or contract modifications over an extended period. Furthermore, f an entit i it is still y applies the practical expedient for contract modifications, required to apply the standard’s contract modification requirements (see s ection 3.4) to modifications made after the beginning of the earliest period presented under IFRS 15 ( e.g ., modifications made after 1 January 2017 for a n adopts the standard using the full entity with a December year - end that retrospective method and presents one comparative period only . ) - — Illustration 1 Transition practical expedient for contract 5 modifications Entity A enter ed into a contract with a customer to sell equipment for CU1 million and provide services for five years for CU20,000 annually. The equipment was delivered on 1 January 2013 and t he service contract commence d at that time. The equipment and the service contract are separate performance obligations. In 2015, the contract was modified to extend it by five years and to provide an additional piece of equipment for CU1 million. The add itional equipment . will be delivered during 2018 and is a separate performance obligation Entity A elects to apply the practical expedient on contract modifications in accordance with IFRS 15.C5(c). A closer look at IFRS 15, the revenue recognition standard Updated October 2018 27

28 Illustration 1 - — Transition practical expedient for contract 5 modifications (cont’d) The total transaction price for the modified contract is CU2,200,000 [CU1 million (equipment) + CU1 million (equipment) + (10 years x CU20,000 (service))], which is allocated to the two products and the service contracts - alone s elling price of each performance based on the relative stand obligation. See section 6 for discussion on allocating the transaction price to performance obligations. The transaction price allocated to the second piece of equipment and the remaining unperf gnis ed when or as they are ormed services would be reco transferred to the customer. FASB differences The FASB’s standard includes a similar practical expedient for contract modifications at transition for entities that elect to apply the full E ntities would retrospective method. apply the F ASB’s practical also expedient to all contract modifications that occur before the beginning of the earliest period presented under the standard in the financial statements. However, this could be a different date for IFRS preparers and US GAAP preparers depending on the number of comparative periods included within an entity’s financial statements (e.g., US GAAP preparers often include two comparative periods in their financial statements). al Unlike he FASB’s standard does not low an entity that uses the t IFRS 15 , full retrospective method to apply ASC 606 only to contracts that are not completed (as defined) as at the beginning of the earliest period presented. standard retrospectively must also provide An entity that elects to apply the the disclosures required in IAS 8 , as follows : Extract from IAS 8 Disclosure 28. When initial application of an IFRS has an effect on the current period or any prior period, would have such an effect except that it is impracticable to determine the amount of the adjustment, or might have an effect on future ty shall disclose: periods, an enti (a) he title of the IFRS; t (b) w hen applicable, that the change in accounting policy is made in accordance with its transitional provisions; (c) t he nature of the change in accounting policy; (d) w hen applicable, a description of the transitional provisions; w hen applicable, the transitional provisions that might have an effect (e) on future periods; Updated October 2018 28 A closer look at IFRS 15, the revenue recognition standard

29 Extract from IAS 8 (cont’d) f presented, to the extent (f) or the current period and each prior period practicable, the amount of the adjustment. f or each financial statement line item affected; and (i) i f IAS 33 Earnings per Share applies to the entity, for basic and (ii) diluted earnings per share; t he amount of the adjustment relating to periods before those presented, (g) to the extent practicable; and i (h) f retrospective application required by paragraph 19(a) or (b) is impracticable for a particular prior period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied. Financial statements of subsequent periods need not repeat these disclosures. An entity must make the above disclosures in the period in which a new standard is applied for the first time. Financial statements in subsequent periods need not repeat the required disclosures. T he IASB provided some additional relief from disclosures (t hrough optional practical expedients) for an entity that elects to apply IFRS 15 on a fully retrospective basis. Although permitted to do so, an entity need not present the quantitative information required by IAS 8.28(f) for periods other than the annual period immediately preceding the first annual period for which IFRS 15 is applied (the ‘immediately preceding period’). Frequently asked questions elected Question 1 - 8 : Does an entity have to apply to expedients practical all periods and to all contracts ? . Entities may elect to apply none, some, or all of these Yes practical a practical expedient , it expedients. However, if an entity elects to use must apply it consistently to all contracts within all periods presented under IFRS 15. It would not be appropriate to apply the selected practical expedient to some, but not all, of the periods presented under IFRS 15. Entities that use some, or all, of the practical expedients are choose to required to provide additional qualitative dis closures (i.e., the types of practical expedients the 20 entity has applied and the likely effect of the application). Question 1 - : If an entity is able to exclude from transition tho se contracts 9 (e.g., because it applies one of the opti that are completed onal practical expedients), how does it account for those completed contracts? Depending on the way in which an entity adopts IFRS 15, it may be able to exclude contracts that meet the def inition of a completed contract from the population of contracts to be transitioned to 15 (i.e., it would not need IFRS to restate those contracts). This is illustrated in section 1.3.1 in Illustrations 1 - 1 through 1 - 4. 20 IFRS 15.C6. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 29

30 Frequently asked questions (cont’d) IFRS 15 clarifies that “if an entity chooses not to apply IFRS 15 to completed contracts in accordance with paragraph C5(a)(ii) or paragraph C7, only contracts that are not completed contracts are included in the transition to tinue to account for the completed contracts IFRS 15. The entity would con 21 ”. in accordance with its accounting policies based on legacy IFRS a n entity might elect to apply the s tandard retrospectively For example, n using the full retrospective method and use the practical expedient i IFRS 15.C5(a)(ii) not to restate contracts that meet the definition of a completed contract at the beginning of the earliest period presented (i.e., 1 January 2017 for an entity with a December year - end that presents one comparative period only) fore, the entity also would not record an . There asset for incremental costs to obtain contracts under IFRS 15 (see section 9.3.1) that meet the definition of a completed contract as at the beginning of the earliest period presented . Furthermore , any assets or liabilities related to completed contracts that are on the balance sheet prior continue to be accounted to the date of the earliest period presented would for 15. Note that a similar under legacy IFRS after the adoption of IFRS optional pra ctical expedient is available under the modified retrospective method (see section 1.3.3). 3 . 3 Modified retrospective adoption (updated October 2018) 1. The standard provides the following requirements for entities applying this transition : method from IFRS 15 Extract C3. An entity shall apply this Standard using one of the following two methods: ... (a) (b) etrospectively with the cumulative effect of initially applying this r Standard recognised at the date of initial application in accordance with C7 – C8. paragraphs ... C7. If an entity elects to apply this Standard retrospectively in accordance with paragraph C3(b), the entity shall recognise the cumulative effect of initially applying this Standard as an adjustment to the opening balance of retained earnings (o r other component of equity, as appropriate) of the annual reporting period that includes the date of initial application. Under this transition method, an entity may elect to apply this Standard retrospectively only to contracts that are not completed con tracts at the date of initial application (for example, 1 January 2018 for an entity with a 31 December end). year - 21 IFRS 15.BC445E. Updated October 2018 30 A closer look at IFRS 15, the revenue recognition standard

31 Extract from IFRS 15 (cont’d) C7A. An entity applying this Standard retrospectively in accordance with paragraph C3(b) may also use the practical expedient described in C5(c), either: paragraph (a) f or all contract modifications that occur before the beginning of the earliest period prese nted; or (b) f or all contract modifications that occur before the date of initial application. If an entity uses this practical expedient, the entity shall apply the expedient consistently to all contracts and disclose the information required by paragraph C6. C8. For reporting periods that include the date of initial application, an entity shall provide both of the following additional disclosures if this Standard is applied retrospectively in accordance with paragraph C3(b): (a) t he amount by which each financial statement line item is affected in the current reporting period by the application of this Standard as compared to IAS 11, IAS 18 and related Interpretations that were in effect before the change; and n explanation of the reasons for significant changes identified in C8(a). (b) a Entities that elect the modified retrospective appl y the standard method retrospectively to only the most current period presented in the financial statements (i.e., the initial period of application) . To do so, the entity ha s to recogni s e the cumulative effect of initially applying IFRS 15 as an adjustment to the opening balance of retained earnings (or other appropriate components of equity) at the date of initial application. How we see it , there is no effect d retrospective method When an entity applies the modifie on the statement of financial position as at the beginning of the preceding period (third statement of financial position according to IAS 1.40A). Furthermore, IFRS d 15 does not require an entity to provide restate or in the notes to comparative information in its financial statements disaggregated revenue disclosures in the (e.g., the financial statements comparative period ) under this method. Therefore, we believe the inclusion of a third statement of financial position as at that date is not required. , Under this IFRS 15 is applied either to all contracts at the date method of initial application (e.g., 1 January 2018 for an entity with a December year - end , see s ection 1. 2 above ) or only to contracts that are not completed at this date Depending on how an entity elects to apply the modified retrospective . method, it ha s to evaluate either all contracts or only those that are not completed before the date of initial application as i f the entity had applied the standard to them since inception. An entity is required to disclose how it has applied the modified retrospective method (i.e., either to all contracts or only to contracts that are not completed at the date of initial applicat ion). An entity may choose to apply the modified retrospective method to all contracts as at the date of initial application (rather than only to contracts that are not completed) in order to apply the same accounting to similar contracts , .1 after the date of adoption. Consider the example discussed in s ection 1.3 is the contract in that example a sale by a retailer on 31 December 2017, A closer look at IFRS 15, the revenue recognition standard Updated October 2018 31

32 considered a completed contract as at the date of initial application (e.g., January 2018 for an entity with a December year - end ). If the retailer 1 adopts the standard only for contracts that are not completed, it would not restate revenue for this contract and would continue to account for the remaining revenue to be recognised under legacy IFRS (i.e., IAS 18) after adopti on of IFRS 15. However, any similar s ales on or after the date of initial 1 January 2018 for an entity with a December year - end) application (e.g., . Accordingly, if the retailer would be subject to the requirements of IFRS 15 transactions under the same accounting model, it prefers to account for similar , rather tha n only to those could choose to adopt the standard for all contracts that are not completed under the standard. How we see it Entities that use the modified retrospective method need to make this election at the entity wide level. That is, they need to carefully consider - whether to apply the standard to all contracts or only to contracts that are not completed as the date of i nitial application, considering the totality of at all of the entity’s revenue streams and the potential disparity in accounting treatment for the same or similar types of transactions after they adopt the standard. Under the modified retrospective method , an entity: Present s comparative periods in accordance with IAS 11, IAS 18 • and related I nterp re tations • Appl ies IFRS 15 to new and existing contracts (either all existing contracts the effective date or only contracts that are not completed contracts) from onwards Recogni e s a cumulative catch - up adjustment to the opening balance of s • for retained earnings at the effective date either for all contracts or only entity i n the year existing contracts that still require performance by the s the amount by which each financial statement line of adoption, disclose IFRS 15 item was affected as a result of applying and an explanation of significant changes entity that chooses the modified retrospective method can use only one of An five practical expedients availab le to entities that apply the full retrospective the , relating to contract modifications . However, under the modified method retrospective method , entities can choose whether to apply the expedient to all contract modifications that occur before either: (a) th e beginning of the earliest period presented (e.g., before 1 January 2017 if an entity with a December year - ; or (b ) the date of initial end presents only one comparative period) ) application for an entity with a December year - end (e.g., 1 January 2018 . Under the expedient, an entity can reflect the aggregate effect of all modifications that occur before either of these dates under IFRS 15 when identifying the satisfied and unsatisfied performance obligations, determining ting the transaction price to the satisfied and the transaction price and alloca unsatisfied performance obligations for the modified contract at transition. An entity that uses this expedient ha s to identify all contract modifications from the inception of the contract until either: ( a ) the beginning of the earliest period to presented under IFRS 15; or (b ) the date of initial application. It then ha s determine how each modification affected the identification of performance at obligations as ld not need to the modification date. However, the entity wou Updated October 2018 32 A closer look at IFRS 15, the revenue recognition standard

33 determine or allocate the transaction price as at the date of each modification. Instead, at the beginning of the earliest period presented under the standard or , the entity would determine the date of initial application of the standard th e transaction price for all satisfied and unsatisfied performance obligations identified in the contract from contract inception . The entity would then perform a single allocation of the transaction price to those performance obligations, lative stand - alone selling prices. See Illustration 1 based on their re 5 in - section 1.3. 2 . If an entity electing the modified retrospective method uses the practical expedient for contract modifications, it is required to provide additional qualitative disclosures (i.e., t he type of practical expedients the entity applied and the likely effects of that application). is practical expedient provide s While th some relief, an entity still need s to use judgement and make estimates. For example, an entity need s to use judgement in estimating stand alone selling prices when there has been a wide - range of selling prices and when allocating the transaction price to satisfied and unsatisfied performance obligations if there have been several performance obligations or contract modifications over an extended period. Furthermore, depending on how the entity elects to adopt the practical expedient, it is required s to apply the standard’s contract modification requirements (see ection 3.4) to either : (a) modifications m ade after the beginning of the earliest period e.g ., modifications made after 1 January 2017 presented under the standard ( - end that presents one comparative period for an entity with a December year only ) l application ( e.g ., ; or (b) modifications made after the date of initia 1 January 2018 for an entity with a December year - modifications made after end that presents one comparative period only ) . FASB differences includes a similar practical expedient for contr act The FASB’s standard modifications at transi H owever, ASC 606 only permits an entity to tion. apply the practical expedient under the modified retrospective method to contract modifications that occur before the beginning of the earliest period January under the standard in the financial statements presented (e.g., 1 . for an entity with a December year ) end - 2018 A closer look at IFRS 15, the revenue recognition standard Updated October 2018 33

34 The following example illustrates the potential effects of the modified method : retrospective 6 — - Cumulative effect of adoption under the modified Illustration 1 retrospective method - A software vendor with a 31 December year end adopts IFRS 15 on 1 January 2018. The vendor adopts the standard using the modified method and elects to apply IFRS 15 only to contracts that retrospective are not completed. The vendor frequently enters into contracts to provide a software licence, professional services and post - delivery service support . It previously accounted for its contracts in accordance with IAS 18, particularly As a result, it recognised fees from the development of its IAS 18.IE19. ftware by reference to the stage of completion of the development, which so - delivery service support services. In effect, included the completion of post the software vendor treated the development of software and post - delivery service support as a single del iverable. IFRS 15 provides more detailed requirements for determining whether promised goods or services are performance obligations (discussed further in s ection 4.2) than IAS 18 provided regarding the number of deliverables . to identify As a result, th e vendor’s analysis of contracts in progress as at January 2018 may result in the identification of different performance 1 As part obligations from those it previously used for revenue recognition. s to allocate the est imated transaction of this assessment, the entity need - alone selling price method price, based on the relative stand (see ection 6.2), to the newly identified performance obligations. s The vendor compare the revenue recognised for each contract, from s contract inception through to 31 Decemb er 2017, to the amount that would have been recognised if the entity had applied IFRS 15 since contract inception. The difference between those two amounts would be accounted for as a cumulative catch - up adjustment and recognised as at 1 January opening retained earnings. From 1 January 2018 onwards, revenue 2018 in recognised would be based on IFRS 15. n entity that elects to apply the modified retrospective A is required to method make certain disclosures in the year of initial application . Specifically, the entity must disclose the amount by which each financial statement line item is affected n IFRS 15 . Further more , an entity must disclose a as a result of applying explanation of the reasons for any significant changes between the reported 15 and . 18 and related Interpretations under IAS 11, IAS results under IFRS Updated October 2018 34 A closer look at IFRS 15, the revenue recognition standard

35 How we see it policies Depending on an entity’s prior accounting , applying the modified may be more difficult than an method entity would anticipate . retrospective S may make application under this method more complex ituations that include the following : • The performance obligations identified under IFRS 15 are different from the elements identified under legacy requirements. /deliverables The relative stand - alone selling price allocation required by IFRS 15 • results in different amounts of the consideration being allocated to performance obligations than had been allocated in the past. • The contract contains variable consideration and the amo unt of variable consideration that can be included in the allocable consideration differs from the amount under legacy requirements. In addition, the modified retrospective method effectively requires an entity to keep two sets of accounting records in the year of adoption in order to comply with the requirement to disclose all affected financial statement line items as if they were prepared under legacy IFRS. Frequently asked questions - 10 : An entity applying the modified retrospective method either Question 1 applies it to all contracts at the date of initial application or only to contracts that are not completed at this date. Is this election made at the - level? reporting entity d Yes. Reporting entities that use the modified retrospective method will nee - wide level. They will need to carefully to make this election at the entity consider whether to apply the standard to all contracts or only to contracts that are not completed as at the date of initial application, considering the reporting entity’s revenue streams and the potential totality of all of the disparity in accounting treatment for the same or similar types of transactions after they adopt the standard. Question 1 - 11 : Does an entity have to apply elected practical expedients to all periods and to all contracts ? 1 See response to Question 8 in section 1.3.2. - Question 1 - 12 : If an entity is able to exclude from transition tho se contracts that are completed (e.g., because it applies one of the optional practical expedients), how does it account for those completed contracts? - 9 section 1.3.2. in See response to Question 1 A closer look at IFRS 15, the revenue recognition standard Updated October 2018 35

36 1.3. 4 isclosures in interim financial statements in the year of Transition d (updated 201 8 ) adoption October requires an entity to disclose changes in IAS 34 Interim Financial Reporting accounting policies, including the effect on prior years that are included in the condensed interim financial statements. Furthermore, it requires that, in the loses “a description of the event of a change in accounting policy, an entity disc 22 In light of these requirements, higher - level nature and effect of the change”. transition disclosures than those required for annual financial statements in accordance with IAS 8 may be sufficient in condensed interim financial 23 statements. If an entity prepares more than one set of interim financial statements during the year of adoption of IFRS 15 (e.g., quarterly), it should provide information consistent with that which was disclosed in its first interim financial report, b ut updated for the latest information. In some cases , the additional disclosures in a subsequent interim period only relate to the subsequent interim period as IAS 34 allows for cross - referencing to other documents available on the same 24 evious interim financial statements terms, such as pr . need to consider the views of local regulators when planning not to Entities repeat in the current interim financial statements any disclosures already . This is because included in previous interim reports or other documents there are different views among regulators as to whether the policy and i mpact disclosures need to be repeated in full in each set of interim financial st or whether cross - referencing to earlier atements issued during the year interim financia l statements or other documents outside the current interim report is acceptable. As an example , in April 2018, ESMA published the annual . report Enforcement and Regulatory Activities of Accounting Enforcers in 2017 ssuers applying IFRS 15 using a modified In it , ESMA clarified that they expect i .C8 15 in all retrospective approach to provide the disclosures required by I FRS 25 interim periods that include the date of initial application of IFRS . 15 , an entity becomes aware of new inf for instance , However, if ormation about the impact of the new standards at the date of initial application in a subsequent interim period, the previously reported impact disclosures will have to be updated in the subsequent interim period. Local regulators may have additional requ irements. For example, foreign private issuers reporting under IFRS that are required to file interim statements may be affected by the SEC’s reporting requirement to provide both the annual and interim period disclosures prescribed by the new accounting s tandard, to the extent not duplicative, in certain interim financial statements in the year of 26 adoption . In addition to these requirements, as discussed in section 10. 6 , entities need to financial provide disaggregated revenue disclosures in their condensed interim statements, both in the year of adoption and on an ongoing basis . 22 IAS 34.16A(a) . 23 See IAS 8.2 8 for the annual disclosure requirements. 24 See IAS 34.16A. 25 Paragraph 63 of ESMA Report Enforcement and Regulatory Activities of Accounting Enforcers in 2017 available on ESMA’s website . 26 Section 1500 of the SEC ’s Division of Corporation Finance’s Financial Reporting Manual, Interim Period Financial Statement Considerations (All Filings) : Interim Period Reporting Disclosures upon Adoption of a New Accounting Standard . Updated October 2018 36 A closer look at IFRS 15, the revenue recognition standard

37 1.3 . Other transition considerations 5 Regardless of th e y choose, many entities have to apply transition the method contracts entered into in prior periods. The population the standard to larger under the full retrospective . However, will be of contracts method , at a minimum , entities have to under the modified retrospective method apply to all contracts that are not completed as at t he date of initial 15 IFRS . application, regardless of when those contracts commenced has he Board method , in the T provided some relief from a full retrospective e dients , and provided the option of a modified form of several practical exp retrospective , which provides one practical expedient. However , there method a number of issues that may make applying IFRS 15 difficult are still application consuming or example: - and/or time , f have to perform an • In the case of full retrospective adoption, entities of the transaction price because of changes to the identified allocation , the transaction price or both. If an entity previously performed deliverables fair value allocation, this step may be straightforward. a relative , an entity stand required to determine the Regardless - alone selling price is at inception of the contract. Depending of each performance obligation as on the age of the contra readily available ct, this information may not be and the prices may differ significantly from current stand - alone selling pric es. While the standard is clear as to when it is acceptable to use hindsight in respect of variable consideration to determin e the transaction s ection . 2 for a discussion on variable consideration ), it is silent price (see 5 on whether the use of hindsight is acceptable for other aspects of the model the or whether it is purpose of allocating the transaction price) (e.g., for the only acceptable to use current pricing information if that were information available. • is Estimating variable consideration for all contracts for prior periods likely to judgement . The standard is clear that hindsight require significant that are not completed when applying the cannot be used for contracts . T he standard full retrospective method is silent on whether the use of hindsight is acceptable for entities applying the modified retrospective . However, the Board’ s method discussion in the Basis for Conclusion s implies that it originally intended to provide no practical expedient s f or the modified 27 retrospective method Furthermore, since entities applying the modified . method only be adjusting contracts that are not retrospective may , it seems likely that the use of hindsight is not acceptable. completed ake this estimate based only on information As a result, entities must m contract inception . Contemporaneous documentation that was available at clarifying what information was available to management and when it , was available, is likely be needed to support these estimates. In addition to estimating variable using the expected value or a most likely consideration amount method , entities have to make conclusions about whether such variable consideration is subject to the constraint (see s ection 5 .2 . 3 for further discussion ). 27 BC . BC443 - 439 See IFRS 15. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 37

38 • modified retrospective method does not require entities to restate The . However , at the date of initial the amounts reported in prior periods entities electing this method application, , either for still have to calculate all contracts or only for contracts that are not completed (depending on how the entity elects to apply this transition method), the revenues they would have recognised as if they had applied IFRS 15 since contract inception . This is needed in order to determine the cumulative effect of adopting the standard. It is likely to be most challenging for contracts in /deliverables which the identified elements or allocable consideration change when IFRS 15 is applied. mber of other issues as they prepare to Finally, entities need to consider a nu adopt IFRS 15 . For example, entities with significant deferred revenue balances under legacy IFRS may experience what some are referring to as ’ lost revenue ’ if those amounts were deferred at the adoption date of IFR S 15 and, ultimately, are reflected in the restated prior periods or as part of the cumulative adjustment upon adoption, but are never reported as revenue in a current period within the financial statements . 1.3. First - time adopters of IFRS (updated October 2018) 6 applies IFRS 1 - First time adoption of International Financial Reporting Standards (and not IFRS 15) when adopting IFRS 15 as part of first time - adoption of IFRS. - According to IFRS 1, a first time adopter may apply the optional practical exped ients included in IFRS 15.C5 (i.e., those that are available for entities , see 1.3.2 above ). However, if a first applying the full retrospective method - time adopter decides to apply any of those optional practical expedients, it must provide the disclosur es required by IFRS 15.C6 (i.e., the types of practical 28 the entity has applied and the likely effect of that application). expedients IFRS 1 also permits a first - time adopter not to restate contracts that were 29 d completed before the earliest period presente . In order (see section 1.3.1) to apply the optional practical expedients in IFRS 15.C5, a first - time adopter of IFRS should read references to the ‘date of initial application’ as the beginning 30 of the first IFRS reporting period (i.e., the date of trans ition to IFRS). How we see it provides Although IFRS 1 also the same optional practical expedients available for IFRS preparers applying the full retrospective method , a doption - may be challenging . For example, of IFRS 15 by first time adopters determination of completed contracts may be practically challenging if the first - time adopters’ previous accounting standards were not clear about when had been transferred . the goods or services 28 IFRS 1.D34. 29 IFRS 1.D35. 30 IFRS 1.D34. Updated October 2018 38 A closer look at IFRS 15, the revenue recognition standard

39 2. Scope all contra cts with customers to provide goods IFRS 15 applies to all entities and or services in the ordinary course of business, except for the following contracts, which are specifically excluded: Lease contracts within the scope of IAS 17 Leases (or IFRS 16 • , Leases ) when effective Insurance contracts within the scope of IFRS 4 Insurance Contracts • (or contracts within the scope of IFRS 17 Insurance Contrac ts when effective, , except when an entity elects to apply IFRS 15 to certain service contracts in accordance with IFRS 17.8 ) • Finan cial instruments and other contractual rights or obligations within 31 the scope of IFRS 9 Financial Instruments IFRS 10 Consolidated Financial , , IFRS 11 , IAS 27 Statements Separate Financial Joint Arrangements Statements and IAS 28 Investments in Associate s and Joint Ventures • Non - monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers In addition, arrangements must meet the criteria set out in IFRS 15.9, which are discussed in s ection 3.1, in order to be accounted for as a revenue contract under the standard. For certain arrangements, entities have to evaluate their relationship with the counterparty to the contract in order to determine whether a vendor - customer relationship exists. Some col laboration arrangements, for example, customer - are more akin to a partnership, while others have a vendor relationship. Only transactions that are determined to be with a customer are within the scope of IFRS 15. See ection 2.3 for a discussion on collabo rative s arrangements. As noted above, when effective, IFRS 17 could change the applicable standard for certain service contracts, specifically fixed - fee service contract s, which are contract s in which the level of servic e depends on an uncertain event . Exam ples include roadside assistance programmes and maintenance contracts in which the service provider agrees to repair specified equipment after a malfunction for a fixed fee . IFRS 17 indicates that these are insurance contracts and therefore, when it is eff ective, that standard would apply. However, if their primary purpose is the provision of services for a fixed fee, IFRS 17 permits entities the choice of applying IFRS 15 instead of IFRS 17 to such contracts if, are met and only if, all of the following conditions : • he entity does not reflect an assessment of the risk associated with an T individual customer in setting the price of the contract with that customer T he contract compensates the customer by providing services, rather than • to the customer by making cash payments And 31 IFRS 9 became effective for annual periods beginning on or after 1 January 2018, superseding IAS 39 . However, entities Financial Instruments: Recognition and Measurement that are applying IFRS 4, have an optional temporary exemption that permits an insuran ce company whose activities are predominantly connected with insurance to defer adoption of IFRS 9. If an entity uses this optional exemption, it continues to apply IAS 39 until an insurer’s first accounting period beginning on or after 1 January 2021 , w hich is are generally the effective date of IFRS 17. References to IFRS 9 in this publication also relevant for IAS 39 . A closer look at IFRS 15, the revenue recognition standard Updated October 2018 39

40 • he insurance risk transferred by the contract arises primarily from the T customer’s use of services rather than from uncertainty over the cost of 32 those services. The entity may make that choice on a contract by contract basis, but the choice for each contract is irrevocable. 2.1 Other scope considerations Certain arrangements executed by entities include repurchase provisions, either as a component of a sales contract or as a separate contract that relates to the same or similar goods in the original agreement. The form of the repurchase agreement and whether the customer obtains control of the asset will determine whether the agreement is within the scope of the standard. See s ection 7.3 for a discussion on repurchase agreements. Entit ies may enter into transactions that are partially within the scope of IFRS 15 and partially within the scope of other standards. In these situations, the standard requires an entity to apply any separation and/or measurement requirements in the other stan dard first, before applying the requirements in IFRS 15. See s ection 2.4 for further discussion. The standard also specifies the accounting requirements for certain costs, such as the incremental costs of obtaining a contract and the costs of fulfilling a contract. However, the standard is clear that these requirements only apply if there are no other applicable requirements in IFRS for those costs. See s ection 9.3 for further discussion on the requirements relating to contract costs in the standard. rtain requirements in IFRS 15 are also relevant for the recognition and Ce measurement a non - financial asset not in of a gain or loss on the disposal of the ordinary course of business (see section 2.1.1 and see section 2.2 for further discussion determin ing whether a transaction is part of an entity’s on ordinary activities ) . 2.1.1 Disposal of non - financial assets not in the ordinary course of business (updated October 2018) IAS 16 When an entity disposes of an asset that is within the scope of Property, , and IAS 40 , IAS 38 Investment Property Intangible Assets Plant and Equipment and part of the entity’s ordinary activities , the transaction is that disposal is not within the scope of those standards, not IFRS 15. However, IAS 16, IAS 38 and IAS 40 were co nsequentially amended when IFRS 15 was issued to requir e entities to use certain of the requirements of IFRS 15 when recogni sing and losses measur gains or ing arising from the sale or disposal of non - financial . assets IAS , IAS 38 and IAS 40 require that the gain or loss arising from the disposal 16 a non of financial asset be included in profit or loss when the item is - derecognised, unless IFRS 16 (or IAS 17) requires otherwise on a sale and leaseback. IAS 16 and IAS 38 specifically prohibit re cognition of any such gain 33 as revenue However, IAS 16 mentions an except ion; in the case of entities . that are in the business of ren ting and selling the same asset, where t he IASB agreed that the presentation of revenue, rather than a net gain or loss on the 32 . IFRS 17.8 33 IAS 16.68, IAS 38.113, IAS 40.69. Updated October 2018 40 A closer look at IFRS 15, the revenue recognition standard

41 34 sale of the assets, would better reflect the ordinary activities of such entities . 35 17) applies to disposal via a sale and leaseback . IFRS 16 (or IAS - financial asset The gain or loss on disposal of a non is the difference between 36 ceeds, if any, and the carrying amount of the item . Under the net disposal pro his means that any revaluation surplus relating to an item of PP&E IAS 16, t of is transferred within equity to retained earnings when the asset is disposed derecognised and not reflected in profit or loss when applying the revaluation 37 model for measurement after recognition. , IAS 16, IAS 38 and IAS 40 provide a consistent model for the As noted above - measurement and recognition of gains and losses on the sale or disposal of non non - financial assets to customers (i.e., not in the ordinary course of business) by referring to the requirements 15 . For sales of non - financial assets in IFRS to non - customers, IAS 16, IAS 38 and IAS 40 requires entities to: • derecognition of the asset) using the requirements in IFRS 15 for determining when a performance obligation is satisfied (i.e., Step 5 requirements , see section 7 ) . • loss on dispo sal in accordance with the requirements for determining the transaction price (i.e., Step 3 requirements , see section 5 ). Any subsequent changes to the estimate of the consideration (e.g., updates of variable consideration estimates, including reassessment of the constraint) are recognised in accordance with the requirements for changes in the transaction price. For example, if variable consideration is constrained at the time of disposal, it would not be recognised in profit or loss until it is no longer constrained, which could be in a subsequent period. The measurement of any gain or loss resulting from the consequential amendments may differ from the gain or loss measured by following the legacy requirements in IAS 18. 5 Non - current Assets Held f IFRS provides or Sale and Discontinued Operations additional requirements for assets held for disposal. These requirements include measurement rules, which affect the measurement of the amount of the gain on disposal to be recognised. IFRS 10 specifies how a pa rent account s for the full or partial disposal of a 38 therefore subsidiary The accounting treatment may , . , differ depending on whether a non - financial asset is sold on its own (in which case IAS 16, IAS 38 or IAS 40 would apply) or included within the full or partial disposal of a subsidiary (in which case , IFRS 10 would apply). Where there is a retained interest in a former subsidiary, other IFRSs (such as IAS 28, IFRS 11 or IFRS 9) may also apply in accounting for the transaction. Similar considera tions apply to disposals of assets held in a corporate wrapper that are in the ordinary course of business, since IFRS 15 excludes transactions within the scope of IFRS 10. Judgement may be needed in determining whether a transaction via the disposal of sh ares is within the scope of IFRS 10, particularly in situations where an asset is transferred into an entity shortly before and as part of a series of planned steps for the disposal transaction, as 34 IAS 16.68A, BC35C. 35 IAS 16.69, IAS 38.113, IAS 40.67. 36 IAS 16.71, IAS 38.113 , IAS 40.69. 37 IAS 16.41 38 applies if a parent loses control of a subsidiary. IFRS 10.23 applies if a parent’s IFRS 10.25 ownership interest in a subsidiary changes without the parent losing control of that subsidiary . A closer look at IFRS 15, the revenue recognition standard Updated October 2018 41

42 this would require that the entity disposed of is controll ed by the seller prior to the disposal. FASB differences 20, Gains and Losses from – - The FASB’s ASC 610 Other Income Derecognition of Nonfinancial Assets , provides guidance on how to account for any gain or loss resulting from the sale of non - financial assets or in - - substance non financial assets that are not an output of an entity’s ordinary activities and are not a business. This includes the sale of inta ngible assets and property, plant and equipment, including real estate, as well as materials and supplies. ASC 610 20 requires entities to apply certain recognition and - measurement principles of ASC 606. Thus, the accounting for a contract e sale of a non - that includes th - customer will financial asset to a non generally be consistent with a contract to sell a non - financial asset to a customer, except for financial statement presentation and disclosure. Sale or transfers of businesses or subsidiaries that do not contain solely non - financial assets and in - - financial assets to non - customers are substance non Consolidation accounted for using the deconsolidation guidance in ASC 810, . As discussed above, IAS 16, IAS 38 and IAS 40 require entities to use certain of the requirements of IFRS 15 when recognising and measuring gains or losses arising from the sale or disposal of non - financial assets when it is not in the ordinary course of business. The sale or disposal of a subsidiary (i.e., loss of control) i s accoun ted for under IFRS 10. Unlike US GAAP, IFRS does not contain specific requirements regarding the sale of in - substance non - financial assets that are not a business. 2.2 Definition of a customer The standard defines a customer “as a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities 39 ”. IFRS 15 does not define the term ‘ordinary in exchange for consideration because it was derived from the definitions of revenue in t activities’ he respective conceptual frameworks of the IASB and the FASB . In particular, the IASB’s Conceptual Framework description of revenue refers specifically to entity and the definition of revenue in the the ‘ordinary activities’ of an FASB’s Statement of Fina refers to the notion of ncial Accounting Concepts No. 6 40 . an entity’s ‘ongoing major or central operations’ In many transactions, a customer is easily identifiable. However, in transactions involving multiple parties, it may be less clear which counterpa rties are customers of the entity. For some arrangements, multiple parties could all be considered customers of the entity. However, for other arrangements, only some of the parties involved are considered customers. Illustration 2 - arty considered to be the customer may 1 below shows how the p differ, depending on the specific facts and circumstances. The identification section 4) of the performance obligations in a contract (discussed further in can have a significant effect on the determination of which party is the entity’s customer. Also see the discussion of the identification of an entity’s customer when applying the application guidance on consideration paid or payable to a customer in ection 5.7. s 39 IFRS 15 Appendix A. 40 , paragraph 78 Statement of Financial Accounting Concepts No. 6 US GAAP, Updated October 2018 42 A closer look at IFRS 15, the revenue recognition standard

43 Illustration 2 - — Identification of a customer 1 - An entity provides internet based advertising services to companies. As part of those services, the entity purchases banner - space on various websites from a selection of publishers. For certain contracts, the entity provides a sophisticated service of matching the ad placement with the pre identified - criteria of the advertising party (i.e., the customer). In addition, the entity pre - purchases the banner - space from the publishers before it finds advertisers for that space. Assu me that the entity appropriately concludes it is acting as the principal in these contracts (see ection 4.4 for further s discussion on this topic). Accordingly, the entity identifies that its customer is the advertiser to whom it is providing services. I n other contracts, the entity simply matches advertisers with the publishers in its portfolio, but the entity does not provide any sophisticated ad - targeting services or purchase the advertising space from the publishers before it finds t space. Assume that the entity appropriately concludes advertisers for tha it is acting as the agent in these contracts. Accordingly, the entity identifies that its customer is the publisher to whom it is providing services. 2.3 Collaborative arrangements In certain transa ctions, a counterparty may not always be a ‘customer’ of the entity. Instead, the counterparty may be a collaborator or partner that shares in the risks and benefits of developing a product to be marketed. This is common in the pharmaceutical, bio gy, oil and gas, and health care industries. technolo - However, depending on the facts and circumstances, these arrangements may - customer relationship component. Such contracts could also contain a vendor still be within the scope of IFRS 15, at least partially, if the collaborator or partner meets the definition of a customer for some, or all, aspects of the arrangement. The IASB decided not to provide additional application guidance for determining whether certain revenue - generating collaborative arrangements would be within the scope of IFRS 15. In the Basis for Conclusions, the IASB explained that it would not be possible to provide application guidance that applies to 41 all collaborative arrangements. Therefore, the parties to such arrangements need to consider a ll of the facts and circumstances to determine whether a vendor - customer relationship exists that is subject to the standard. However, the IASB did determine that, in some circumstances, it may be appropriate for an entity to apply the principles in IFRS 15 to collaborations or partnerships (e.g., when there are no applicable or more relevant requirements 42 that could be applied). 41 IFRS 15.BC54. 42 IFRS 15.BC56. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 43

44 How we see it legacy IFRS, identifying the customer could Under be difficult, especially were involved in the transaction. This evaluation may when multiple parties have require d significant judgement and IFRS 15 does not provide additional factors to consider. Furthermore, transactions among partners in collaboration arrangements are not within the scope of IFRS 15. Therefore, en tities need to use judgement to determine whether transactions are between partners acting in their capacity as collaborators or reflect a vendor - customer relationship. (updated October 2018) 2.4 Interaction with other standards The standard provides requ irements for arrangements partially within the scope of IFRS 15 and partially within the scope of other standards, as follows: Extract from IFRS 15 7. A contract with a customer may be partially within the scope of this Standard 5. and partially within the scope of other Standards listed in paragraph (a) If the other Standards specify how to separate and/or initially measure one or more parts of the contract, then an entity shall first apply the separation and/or measurement requirements in those Standards. A n entity shall exclude from the transaction price the amount of the part (or parts) of the contract that are initially measured in accordance with other Standards and shall apply paragraphs 73 – 86 to allocate the amount of the transaction price that rema ins (if any) to each performance obligation within the scope of this Standard and to any other parts of the contract identified by paragraph 7(b). If the other Standards do not specify how to separate and/or initially (b) ract, then the entity shall apply measure one or more parts of the cont this Standard to separate and/or initially measure the part (or parts) the contract. of Updated October 2018 44 A closer look at IFRS 15, the revenue recognition standard

45 requirements : The following chart illustrates th ese Is the contract entirely in the scope of other standards? Yes No Apply the requirements in the other standards Is the contract with a customer partially within the scope of other standards? No Apply IFRS 15 to the entire contract Yes Do the other standards specify how to separate and/or initially No IFRS 15 pply A to separate and/or initially measure one or more parts of measure the part (or parts) of the contract the contract? Yes A pply the separation and/or in measurement requirements those standards. E xclude from the transaction (or parts) of the Apply IFRS 15 to the part price the amount of the part (or contract within its scope parts) of the contract that are Apply other standards to the part (or parts) of initially measured in accordance the contract within their scope th other standards wi standard or of the arrangement is covered by another a component If interpretation asu re that how to separate and/or initially me specifies that entity needs to element, the apply IFRS 15 to the remaining components of the arrangement. Some examples of where separation and/or initial measurement are addressed in other IFRS include the following: • requires that a financial instrument be recognised at fair IFRS 9 generally value at initial recognition. For contracts that include the issuance of a 15 within the scope of IFRS financial instrument and revenue components and the financial instrument is required to be in itially recognised at fair value , the fair value of the financial instrument is first measured and the remainder of the estimated contract consideration is allocated among the other components in the contract in accordance with IFRS 15. Determinin • IFRIC 4 g whether an Arrangement contains a Lease requires the allocation of an arrangement’s consideration between a lease and other components within a contractual arrangement using a relative fair value 43 approach. I n March 2016, the IASB issued a new leases st andard, IFRS 16. The new leases standard is effective annual periods beginning January 2019 (i.e., one year after IFRS 15). Early adoption is after 1 permitted for all entities, provided IFRS 15 has been applied or is applied at the same date as IFRS 16. Conversely, i f a component of the arrangement is covered by another standard or interpretation, but that standard or interpretation does not specify how to separate and/or initially measure that component, the entity needs to apply IFRS 15 to separate and /or initially measure each component. For example, specific requirements do not exist for the separation and measurement of the 43 See IFRIC 4.13. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 45

46 different parts of an arrangement when an entity sells a business and also enters into a long term supply agreement with the oth er party. See s ection 6.6 - for further discussion on the effect on the allocation of arrangement consideration when an arrangement includes both revenue and non revenue - components. ed What’s chang legacy IFRS? from Entities entering into transactions that fall within the scope of multiple standards need to separate those transactions into components, so that each component can be accounted for under the relevant standards. IFRS 15 does not change this requirement. Ho wever, under legacy IFRS, revenue transactions would often be separated into components that were accounted for under different revenue standards and/or interpretations (e.g., a transaction involving the sale of goods and a customer loyalty programme that fell within the scope is of both IAS 18 and IFRIC 1 3 , respectively). This no longer relevant as there is a single revenue recognition model under IFRS 15. IAS 18 specifie d the accounting treatment for the recognition and measurement of interest and dividen ds. Interest and dividend income are excluded from the scope of IFRS 15. Instead, the relevant recognition and 44 measurement requirements have been moved to IFRS 9. Frequently asked questions Question 2 - 1: Before applying the financial instruments standards, are - payment transactions that are part of Sharia - compliant deferred instruments and transactions within the scope of the revenue standard? [TRG meeting 26 January 2015 Agenda paper no. 17] – Islamic financial institutions (IFIs) enter into Shari - compliant instruments a and transactions that do not result in IFIs earning interest on loans. Instead, these transactions involve purchases and sales of real assets (e.g., vehicles) on which IFIs can earn a premium to compensate them for deferred payment terms. Typically, an IFI makes a cash purchase of the underlying asset, takes legal possession, even if only for a short time, and immediately sells the asset on deferred payment terms. The financial instruments created by these transactions are within the scope of the financial instruments standards. At the January 2015 TRG meeting, IASB TRG members discussed whether - (before applying the financial instruments standards) deferred payment transactions that are part of Sharia - compliant instruments and transac tions are within the scope of IFRS 15. IASB TRG members generally agreed that Sharia compliant instruments and transactions may be outside the scope of - the standard. However, the analysis would depend on the specific facts and circumstances. This may requi re significant judgement as contracts often differ within and between jurisdictions. FASB TRG memb ers did not discuss this issue. 44 See . B5.4.3 - IFRS 9.B5.4.1 Updated October 2018 46 A closer look at IFRS 15, the revenue recognition standard

47 Frequently asked questions (cont’d) - - generating activities of financial institutions Question 2 2: Are certain fee in the - servicing scope of the revenue standard (i.e., servicing and sub financial assets, providing financial guarantees and providing deposit - related services)? [FASB TRG meeting 18 April 2016 – Agenda paper no. 52] FASB TRG members generally agreed that the sta ndard provides a framework for determining whether certain contracts are in the scope of the FASB’s standard, ASC 606, or other standards. As discussed above, the standard’s scope includes all contracts with customers to provide goods or services in the or dinary course of business, except for contracts with customers that topics that are listed as scope are within the scope of certain other ASC exclusions. If another standard specifies the accounting for the consideration (e.g., a fee) received in the arra ngement, the consideration is outside the scope of ASC 606. If other standards do not specify the accounting for the consideration and there is a separate good or service provided, the 606. T he FASB consideration is in (or at least partially in) the scope of ASC staff applied this framework in the TRG agenda paper to arrangements to service financial assets, provide financial guarantees and provide deposit - related services. FASB TRG members generally agreed that income from servicing financial assets (e.g., loans) is not within the scope of ASC 606. An asset servicer performs various services, such as communication with the borrower and ee. FASB TRG members generally payment collection, in exchange for a f , agreed that an entity should look to ASC 860, Transfers and Servicing to determine the appropriate accounting for these fees. This is because ASC 606 contains a scope exception for contracts that fall under ASC 860, rovides requirements on the recognition of the fees (despite not which p providing explicit requirements on revenue accounting). FASB TRG members generally agreed that fees from providing financial guarantees are not within the scope of ASC 606. A financial institution may receive a fee for providing a guarantee of a loan. These types of financial scope of ASC 460, guarantees are generally within the or Guarantees ASC 815, . FASB TRG members generally agreed Derivatives and Hedging that an entity should look to ASC 460 or ASC 815 to determine the appropriate accounting for these fees. This is because ASC 606 contains a scope excepti on for contracts that fall within those topics, which provide principles an entity can follow to determine the appropriate accounting to reflect the financial guarantor’s release from risk (and credit to earnings). at fees from deposit - related FASB TRG members also generally agreed th services are within the scope of ASC 606. In contrast to the decisions for servicing income and financial guarantees, the guidance in ASC 405, , that financial institutions apply to determine the appropriate Liabilities liabili ty accounting for customer deposits, does not provide a model for recognising fees related to customer deposits (e.g., ATM fees, account maintenance or dormancy fees). Accordingly, FASB TRG members generally agreed that deposit fees and charges are within the scope of ASC 606, even though ASC 405 is listed as a scope exception in ASC 606, because of the lack of guidance on the accounting for these fees in ASC 405. It should be noted that, while this was not specifically discussed by the TRG, IFRS pre parers may find the FASB TRG’s discussions helpful IASB in assessing whether certain contracts are within the scope of IFRS 15 or other standards. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 47

48 Frequently asked questions (cont’d) - Question 2 3: Are credit card fees in the scope of the FASB’s revenue standard? [TRG meeting 13 July 2015 – Agenda paper no. 36] A bank that issues credit cards can have various income streams (e.g., annual fees) from a cardholder under various credit card arrangements. Some of services (e.g., concierge these fees may entitle cardholders to ancillary services, airport lounge access). The card issuer may also provide rewards to cardholders based on their purchases. US GAAP stakeholders had questioned whether such fees and programmes are within the scope of the revenue standard s, particularly when a good or service is provided to a cardholder. While this question has only been raised by US GAAP stakeholders, IASB TRG members generally agreed that an IFRS preparer first need to s determine whether the credit card fees are within the scope of IFRS 9. IFRS 9 require that any fees that are an integral part of the effective interest rate for a financial instrument be treated as an adjustment to the effective interest rate. Conversely, any fees that are not an integral part of the eff ective interest rate of the financial instrument are generally accounted for under IFRS 15. FASB TRG members generally agreed that credit card fees that are accounted for under ASC 310 are not in the scope of ASC 606. This includes Receivables s that may entitle cardholders to ancillary services. FASB TRG annual fee members noted that this conclusion is consistent with GAAP legacy US requirements for credit card fees. However, the observer from the US SEC be that of a credit card noted that the nature of the arrangement must truly lending arrangement in order to be in the scope of ASC 310. As such, entities will need to continue to evaluate their arrangements as new programmes develop. Credit card fees could, therefore, be treated differently under IFRS and US GAAP. Question 2 - 4: Are cardholder rewards programmes in the scope of the FASB’s revenue standard? [TRG meeting 13 July 2015 – Agenda paper no. 36] FASB TRG members generally agreed that if all consideration (i.e., credit card above discussed in Questi on 2 - 3 fees ) related to the rewards programme is determined to be within the scope of ASC 310, the rewards programme is not in the scope of ASC 606. However, this determination has to be made based credit card reward on the facts and circumstances due to the wide variety of programmes offered. IASB TRG members did not discuss this issue because the question was only raised in relation to US GAAP. legacy Updated October 2018 48 A closer look at IFRS 15, the revenue recognition standard

49 Frequently asked questions (cont’d) 5: Are contributions in the scope of the FASB’s revenue - Question 2 standard? [TRG meeting 30 March 2015 – Agenda paper no. 26] has amended ASC 606 to clarify that an entity need The FASB to consider s requirements in ASC 958 - 605 , the - for - Profit Entities – Revenue Not contr ibution within when determining whether a transaction is a Recognition 45 ASC 958 - 605 or a transaction within the scope of ASC 606. the scope of for contributions received in ASC requirements The 958 - 605 generally appl y to all entities that receive contributions ( i.e., not just not for - profit entities), - ess otherwise indicated. unl , FASB TRG members discussed this issue Before the amendment and generally agreed that contributions are not within the scope of ASC 606 because they are non - reciprocal transfers. That is, contributions generally do not represent c onsideration given in exchange for goods or services that are an output of the entity’s ordinary activities. IASB TRG members did not the context of US discuss this issue because the question was only raised in GAAP. Question 2 - 6: Are fixed - odds wagering contracts within the scope of the revenue standard? In fixed - odds wagering contracts, the payout for wagers placed on gam bl ing activities ( e.g., table games, slot machines, sports betting) is known at the time the wag er is placed. 2007 IFRS Interpretations Committee Under IFRS, consistent with a July (IFR S the definition of a derivative IC) agenda decision, wagers that meet are within the scope of IFRS 9. Those that do not meet the definition of a derivative hin the scope of IFRS 15. are wit FASB differences Under US GAAP, the FASB added scope exceptions in ASC 815 and 924, Entertainment , in December 2016 to clarify that Casinos ASC — fixed odds wagering arrangements are within the scope of ASC 606. - - uestion 2 7 : Are pre Q production activities related to long - term supply - arrangements in the scope of the revenue standard ? In some long - term supply arrangements, entities perform upfront engineering and design activities to create new technology or adapt existing techn ology to the needs of the customer. These pre according - production activities are often a prerequisite to delivering any units under a production contract. need to activities are promises pre - production Entities evaluate whether the ustomer (and potentially performance obligations) under in a contract with a c IFRS 15 . When making this evaluation, entities need to determine whether the activit ies transfer a good or service to a customer . Refer to Question 4 - 1 in section 4.1.1 mining whether pre - production for further discussion on deter activities are promised goods or services under IFRS 15 . If an entity determines that these activities are promised goods or services, it will apply the requirements in IFRS 15 to those goods or services. 45 - For Profit Entities (Topic 958): ASU 2018 - 08 , Accounting Standards Update 2018 - 08 — Not - And Accounting Guidance For Contributions Received And Clarifying The Scope Contributions Made . A closer look at IFRS 15, the revenue recognition standard Updated October 2018 49

50 Frequently asked questions (cont’d) - : Are sales of by - products or scrap materials in the scope of Q 8 uestion 2 the revenue standard ? by - products or Consider an example in which a consumer products entity sells d scrap material s that are produced as a result of it s accumulate . In determining sale of by - products or whether the manufacturing process materials to third parties is in the scope of IFRS 15, an entity first scrap s whether the sale of such items determine is an output of the entity’s ordinary activities. This is beca use IFRS 15 defines revenue as “income 46 If an entity arising in the course of an entity’s ordinary activities”. such items represents revenue from a contract determines the sale of under IFRS 15 . with a customer, it would generally recognise the sale If an entity determines that such sales are not in the course of its ordinary activities, the entity would recognis e those sales separately from revenue from contracts with customers because they represent sales to non - customers . e the We do not believe that it woul d be appro priate for an entity to recognis sale of by - as a reduction of cost of goods sold. product s or scrap materials This is because recognising the sale of - products or scrap materials as a by y reflect the cost of raw reduction of cost of goods sold may inappropriatel However, this materials used in manufacturing the main product. if interpretation would not apply other accounting standards allow for recognition as a reduction of costs . IAS requires that the costs of conversion of the main product 2 Inventories and the by - product be allocated between the products on a rational and consistent basis. However, IAS 2 mentions th at most by - products, by their nature, are immaterial. When this is the case, they are often measured at net realisable valu e and this value is deducted from the cost of the main product. As a result, the carrying amount of the main product is not materially 47 different from its cost. We believe that the language in IAS 2 only relates to the allocation of the costs of conversio n between the main product and by - - product and does not allow the proceeds from the sale of by products to be presented as a reduction of cost of goods sold. - 9 Are the sales of prepaid gift cards within the scope of Question 2 IFRS 15? Entities may sell prepaid gift cards in their normal course of business in exchange for cash. The prepaid gift cards typically provide the customer with the right to redeem those cards in the future for goods or services of the entity and/or third parties . For any unused balance of the prepaid gift cards, entities need to recognise a liability that will be released upon redemption of that unused balance. However, the features of each prepaid gift card may vary and the nature of the liability will depend on the assessment of these features. Entities may need to use judgement in order to determine whether the prepaid gift card is within the scope of IFRS 15 or another standard. Prepaid g ift cards that give rise to financial liabilities are within the scope of IFRS 9. If a prepaid gift card does not give rise to a financial liability is likely to be within the scope of IFRS 15. For further information on applying IFRS 15 to prepaid gift cards within its scope refer to section 7.9. 46 IFRS 15 Appendix A. 47 2.14. IAS Updated October 2018 50 A closer look at IFRS 15, the revenue recognition standard

51 Frequently asked questions (cont’d) An example of a prepaid card that is within the scope of IFRS 9 was discussed by the IFRS IC its March 2016 meeting. The issue related to the accounting at treatment of any unused balance on a prepaid card issued by an entity in exchange for cash as well as the classification of the relevant liability that arises. The discussion was limited to prepaid cards that have the specific 48 features described in the request received by the IFRS IC. In particular, the prepaid card: a. Has no expiry date and no back - end fees. That is, any unspent balance does not reduce unless it is spent by the cardholder b. - refundable, non - redeemable and non Is non exchangeable for cash - c. Can be redeemed only for goods or services to a specified monetary amount And - Can be redeemed only at specified third d. party merchants (the range of merchants accepting the specific card could vary depending on the card programme) and, upon redemption, the entity delivers cash to the 49 merchant(s) The IFRS IC observed that when an entity is sues a prepaid card with the above features, it is contractually obligated to deliver cash to the merchants on behalf of the cardholder. Although this obligation is conditional upon the cardholder redeeming the card by purchasing goods or services, the ent ity’s right to avoid delivering cash to settle this contractual obligation is not unconditional. On this basis, the IFRS IC concluded that the entity’s liability for such a prepaid card meets the definition of a financial liability and would fall within th . e scope of IFRS 9 and IAS 32 Financial Instruments: Presentation Therefore, the IFRS IC decided not to add this issue to its agenda. The IFRS IC also noted in its agenda decision that its discussion on this issue did not s. include customer loyalty programme - 10 : Question 2 contract that How does a utility entity determine whether a includes a non - refundable upfront fee received for establishing a connection to a network (i.e., a connection fee) is within the scope of IFRS 15 ? See response to Question - 30 in section 5.8. 5 48 IFRIC Update , March 2016, available on the IASB’s website . 49 IASB’s website , March 2016, available on the IFRIC Update . A closer look at IFRS 15, the revenue recognition standard Updated October 2018 51

52 3. Identify the contract with the customer To apply the model in IFRS 15, an entity must first identify the contract, or contracts, to provide goods services to customers . or create enforceable rights and obligations to fall within the A contract must scope of the model in the standard. Such contracts may be written, oral or implied by an entity’s customary business practices. For example, if an entity has an established practice of starting performance based on oral agreements with its customers, it may determine that such oral agreements meet the definition of a contract. As a result, an entity may need to account for a contract as soon as performance begins, rather than delay revenue recogn ition until the arrangement is documented in a signed contract, as was often the case under legacy IFRS . Certain arrangements may require a written contract to comply with laws or regulations in a particular jurisdiction. These requirements must be consid ered when determining whether a contract exists. In the Basis for Conclusions, the Board acknowledged that entities need to look at the relevant legal framework to determine whether the contract is enforceable because factors that determine enforceability may differ among 50 jurisdictions. The Board also clarified that, while the contract must be legally enforceable to be within the scope of the model in the standard, all of the promises do not have to be enforceable to be considered performance (see s obligations ection 4.1). That is, a performance obligation can be based on the customer’s valid expectations ( e.g., due to the entity’s business practice . of providing an additional good or service that is not specified in the contract) In addition, the standard clarifies that some contracts may have no fixed duration and can be terminated or modified by either party at any time. Other contracts may automatically renew on a specified periodic basis. Entities are required to apply IFRS 15 to the contractual period in which the parties have present enforceable rights and obligations. Contract enforceability and s termination clauses are discussed in ection 3.2. Illustration 3 - 1 — Oral contract IT Support Co. provides online technology suppor t for customers remotely via the internet. For a fixed fee, IT Support Co. will scan a customer’s personal computer (PC) for viruses, optimise the PC’s performance and solve any connectivity problems. When a customer calls to obtain the scan services, IT Support Co. describes the services it can provide and states the price for those services. When the customer agrees to the terms stated by the representative, payment is made over the telephone. IT Support Co. then gives the customer the information it ne eds to obtain the scan services (e.g., an access code for the website). It provides the services when the customer connects to the internet and logs onto the entity’s website (which may be that day or a future date). In this example, IT Support Co. and it s customer are entering into an oral agreement, which is legally enforceable in this jurisdiction, for IT Support Co. to repair the customer’s PC and for the customer to provide consideration by r the telephone. transmitting a valid credit card number and authorisation ove 50 IFRS 15.BC32. Updated October 2018 52 A closer look at IFRS 15, the revenue recognition standard

53 Illustration 3 - — Oral contract (cont’d) 1 The required criteria for a contract with a customer (discussed further below) are all met. As such, this agreement will be within the scope of the model in telephone conversation, even if the entity has the standard at the time of the not yet performed the scanning services. (updated October 3.1 Attributes of a contract 2018) To help entities determine whether (and when) their arrangements with customers are contracts within the scope of the model in the standard, the 51 Board identified certain attributes that must be present , as follows: • The parties have approved the contract and are committed to perform their respective obligations . • Each party’s rights regarding the goods or services to be transferred can be identified . • Payment terms can be identified . • The contract has commercial substance . • It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transfer red to the customer. The Board noted in the Basis for Conclusions that the criteria are similar to those in previous revenue recognition requirements and in other existing standards and tains are important in an entity’s assessment of whether the arrangement con 52 enforceable rights and obligations. These criteria are assessed at the inception of the arrangement. If the criteria are met at that time, an entity does not reassess these criteria unless there is 53 For example, an indication of a significant change in facts and circumstances. as noted in IFRS 15.13, if the customer’s ability to pay significantly deteriorates, an entity would have to reassess whether it is probable that the entity will collect the consideration to which it is entitled in exchange f or transferring the remaining goods services under the contract. The updated or assessment is prospective in nature and would not change the conclusions associated with goods or services already transferred. That is, an entity would not reverse any receiva bles, revenue or contract assets already recognised 54 . under the contract If the criteria are not met , the arrangement is (and until the criteria are met) not considered a revenue contract under the standard and the requirements discussed in ection 3.5 mu st be applied. s 51 IFRS 15.9. 52 IFRS 15.BC33. 53 IFRS 15.13. 54 IFRS 15.BC34. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 53

54 Frequently asked questions - 1: Question 3 Does a master supply arrangement (MSA) create enforceable the scope of the within rights and obligations to be considered a contract IFRS 15 ? model in ntit y may use an MSA to govern the overall terms and conditions of An e a business arrangement between itself and customer (e.g., scope of services, a pricing, payment terms, warranties and other rights and obligations). Typically, when a and a customer enter into a n n MSA , purchases are entity subsequently made by the customer by issuing a non - cancel l able purchase order o r an approved online authoris that explicitly references the MSA ation , services and quantities to be delivered. and specifies the products is In such cases, the MSA likely to create enforceable rights and un obligations , which are needed to be considered a contract within the scope of the model in IFRS 15 This is because, w hile the MSA may specify the pricing . or payment terms, it usually does not specify the specif ic goods or services, or quantities thereof, to be transferred. Therefore, each party’s rights and obligations regarding the goods or services to be transferred are not identifiable . I t is likely that the MSA and the customer order, taken together, would constitute a contract under IFRS 15. As such, entities need to evaluate both the MSA and the subsequent customer order(s) together to determine whether and when the criteria in IFRS 15 are met. .9 f an MSA includes an enforceable clause requiring the custo I mer to purchase a minimum quantity of goods or services, the MSA alone may constitute a contract under the standard because enforceable rights and obligations exist for this minimum amount of goods or services. - 2 : How would Question 3 an entity determine whether a contract exists within the scope of the model during a free trial period? Free trial periods are common in certain subscription arrangements (e.g., magazines, streaming services). A customer may receive a number of free ’ ‘ months of goods or servi ces at the inception of an arrangement ; before the paid subscription begins ; or as a bonus period at the beginning or end of a paid subscription period. IFRS 15, revenue should not be recognis Under ed until an entity determines that a contract within the scope of the model exists. Once an entity IFRS 15 contract exists, it is required to identify the determines that an promises in the contract. Therefore, if the entity has transferred goods or es prior to the existence of an IFRS 15 contract, we believe that the servic free goods or services provided during the trial period would generally be accounted for as marketing incentives. Consider an example in which an entity has a marketing program me to pro its services to prospective vide a three month free trial period of customers. The entity’s customers are not required to pay for the services provided during the free trial period and the entity is under no obligation to provide the services under the mar keting program me . If a customer enters into a contract with the entity at the end of the free trial period that obligates to provide services in the future (e.g., the entity signing up for a Updated October 2018 54 A closer look at IFRS 15, the revenue recognition standard

55 Frequently asked questions (cont’d) 12 - subsequent month period) and obligates the customer to pay for the services, the services provided as part of the marketing program me may not be promises that are part of an enforceable contract with the customer. However, if an entity, as part of a negotiation with a prospective customer, agrees to provide three free months of services if the customer agrees to pay for 12 months of services (effectively providing the customer a discount on 15 months), the entity would identify the free months as promises in the contract because the contract requires it to provide them. The above interpretation applies if the customer is not required to pay any consideration for the additional good or services during the trial period (i.e., s they are free). If the customer is required to pay consideration in exchange for the goods or services received during the trial period (even if it is only a nominal amount), a different accounting conclusion could be reached. Entities need to apply judg e ment to evaluate whether a contract exists that falls within the scope of the standard . Question 3 - 3 : Should entities consider side agreements when determining whether a contract exists within the scope of the model ? Yes, all terms and conditions that create or negate enforceable rights and obligations must be considered when determining whether a contract exists side under the standard. Understanding the entire contract, including any agreements or other amendments, is critical to this determination. ract that either Side agreements are amendments to a cont can be undocumented or separate ly from the main contract. The documented potential for side agreements is greater for complex or material transactions or when complex arrangements or relationships exist between an entity and Side agreements may be communicated in many forms its customers. ( e.g., oral agreements, email, letters or contract amendments ) and may be entered into for a variety of reasons. for Side agreements may provide an incentive a customer to enter into a contract near the e nd of a financial reporting period or to enter into a contract that it would not enter into in the normal course of business. Side agreements may entice a customer to accept delivery of goods or services with rights in excess of earlier than required or may provide the customer those customarily provided by the entity. For example, a side agreement may extend contractual payment terms ; expand contractually stated rights ; provide a right of return ; or commit the entity to provide future products or functi onality not contained in the contract or to assist resellers in selling a product. Therefore, if the provisions in a side agreement differ from those in the main contract, an entity should assess whether the side agreement ns or changes existing rights and obligations. new rights and obligatio creates See sections 3.3 and 3.4, respectively, for further discussion of the standard’s requirements on combining contracts and contract modifications. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 55

56 3.1.1 Parties have approved the contract and are committed to perform their respective obligations Before applying the model in IFRS 15, the parties must have approved the contract. As indicated in the Basis for Conclusions, the Board included this ion because a contract might not be legally enforceable without the criter 55 Furthermore, the Board decided that the form of approval of both parties. the contract (i.e., oral, written or implied) is not determinative in assessing d the contract. Instead, an entity must whether the parties have approve consider all relevant facts and circumstances when assessing whether the parties intend to be bound by the terms and conditions of the contract. In some intent to fulfil cases, the parties to an oral or implied contract may have the their respective obligations. However, in other cases, a written contract may be required before an entity can conclude that the parties have approved the arrangement. o conclude In addition to approving the contract, the entity must also be able t that both parties are committed to perform their respective obligations. That is, the entity must be committed to providing the promised goods or services. In addition, the customer must be committed to purchasing those promised goods or servi ces. In the Basis for Conclusions, the Board clarified that an entity and a customer do not always have to be committed to fulfilling all of their 56 respective rights and obligations for a contract to meet this requirement. a supply agreement between two parties that The Board cited, as an example, includes stated minimums. The customer does not always buy the required minimum quantity and the entity does not always enforce its right to require the customer to purchase the minimum quantity. In this situati on, the Board stated that it may still be possible for the entity to determine that there is sufficient evidence to demonstrate that the parties are substantially committed to the contract. This criterion does not address a customer’s intent and ability to pay the consideration (i.e., collectability). Collectability is a separate criterion and is discussed in s ection 3.1.5. Termination clauses are also an important consideration when determining a contract and, whether both parties are committed to perform under See consequently, whether a contract exists. ection 3.2 for further discussion s of termination clauses and how they affect contract duration. ed from legacy IFRS? What’s chang g acy Le did not provide specific application guidance on oral contracts. IFRS However, entities were required to consider the underlying substance and economic reality of an arrangement and not merely its legal form. states that representing The Conceptual Framework for Financial Reporting a legal form that differs fro m the economic substance of the underlying 57 economic phenomenon may not result in a faithful representation. Despite the focus on substance over form in IFRS, treating oral or implied agreements as contracts is likely to be for some a significant change in practice entities. It may have led to earlier accounting for oral agreements, i.e., not waiting until such agreements are formally documented. 55 IFRS 15.BC35. 56 IFRS 15.BC36. 57 BC3.26 ; the revised , paragraph The Conceptual Framework for Financial Reporting Conceptual Framework for Financial Reporting paragraph 2.12 (effective for annual periods 020) beginning on or after 1 January 2 . Updated October 2018 56 A closer look at IFRS 15, the revenue recognition standard

57 3.1.2 Each party’s rights regarding the goods or services to be transferred can be identified This criterion is relatively straightforward. If the goods services to be or provided in the arrangement cannot be identified, it is not possible to conclude that an entity has a contract within the scope of the model in IFRS 15. The or services cannot be identified, the Board indicated that i f the promised goods or services have been transferred entity cannot assess whether those goods because the entity would be unable to assess each party’s rights with respect 58 services . to those goods or 3.1.3 Payment terms can be identified Identifying the payment terms does not require that the transaction price be fixed or stated in the contract with the customer. As long as there is an enforceable right to payment (i.e., enforceability as a matter of law) and the c ontract contains sufficient information to enable the entity to estimate the transaction price (see further discussion in s ection 5), the contract would qualify for accounting under the standard (assuming the remaining criteria set out in IFRS 15.9 in the extract in s ection 3.1 above have been met). 3.1.4 Commercial substance The Board included a criterion that requires arrangements to have commercial substance (i.e., the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract) to prevent entities from 59 artificially inflating revenue. The model in IFRS 15 does not apply if an arrangement does not have commercial substance. Historically, some entities in high - growth industries allegedly engaged in transact ions in which goods services were transferred back and forth between the same entities in or an attempt to show higher transaction volume and gross revenue (sometimes known as ‘round tripping’). This is also a risk in arrangements that involve non - - onsideration. cash c Determining whether a contract has commercial substance for the purposes of IFRS 15 may require significant judgement. In all situations, the entity must be able to demonstrate a substantive business purpose exists, considering the nature a nd structure of its transactions. In a change from the requirements in SIC - 31, IFRS 15 does not contain legacy requirements specific to advertising barter transactions. We anticipate entities will need to carefully consider the commercial substance criterion when evaluating these types of transactions. 3.1.5 Collectability Under IFRS 15, collectability refers to the customer’s ability and intent to pay the amount of consideration to which the entity will be entitled in exchange for the goods or services that will be transferred to the customer. An entity should assess a customer’s ability to pay based on the customer’s financial capacity and its intention to pay considering all relevant facts and circumstances, including past experiences with th at customer or customer 60 class. In the Basis for Conclusions, the Board noted that the purpose of the criteria in IFRS 15.9 is to require an entity to assess whether a contract is valid and represents a genuine transaction. The collectability criterion ( i.e., determining whether the customer has the ability and the intention to pay the promised 58 IFRS 15.BC37. 59 IFRS 15.BC40. 60 IFRS 15.BC45. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 57

58 consideration) is a key part of that assessment. In addition, the Board noted that, in general, entities only enter into contracts in which it is probable that 61 e entity will collect the amount to which it will be entitled That is, in most th . instances, an entity would not enter into a contract with a customer if there was significant credit risk associated with that customer without also having adequate economic protection to ensure that it would collect the consideration. The IASB expects that only a small number of arrangements may fail to meet 62 the collectability criterion. The standard requires an entity to evaluate at contract inception (and when significant facts and circumstances change) whether it is probable that it will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to a customer. This is consistent with legacy IFRS, where revenue re cognition was permitted only when it was probable that the economic benefits associated with the transaction would flow to the entity d (assuming other basic revenue recognition criteria ha been met). For purposes of this analysis, the meaning of the term ’probable’ is consistent 63 If it is not with the existing definition in IFRS, i.e., “more likely than not”. probable that the entity will collect amounts to which it is entitled, the model in IFRS 15 is not applied to the contract until the concerns about collectability have been resolved. However, other requirements in IFRS 15 apply to such arrangements (see s ection 3.5 for further discussion). IFRS 15.9(e) specifies that an entity should assess only the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer (rather than the total amount promised for all goods or services in the contract). In the Basis for Conclusions, the Board noted that, if the custo mer were to fail to perform as promised and the entity were able to stop transferring additional goods or services to the customer in response, the entity would not consider the likelihood of payment for those d in its assessment of goods or services that would not be transferre 64 collectability. In the Basis for Conclusions, the Board also noted that the assessment of collectability criteria requires an entity to consider how the entity’s contractual rights to the consideration relate to its performance obli gations. That assessment considers the business practices available to the entity to manage its exposure to credit risk throughout the contract (e.g., through advance 65 payments or the right to stop transferring additional goods or services). The amount of consideration that is assessed for collectability is the amount to which the entity will be entitled, which under the standard is the transaction price for the goods or services that will be transferred to the customer, rather than the stated contract pric e for those items. Entities need to determine the transaction price in Step 3 of the model ( as discussed in section 5) before assessing the collectability of that amount. The contract price and transaction consideration (e.g., rebates, price most often will differ because of variable discounts or explicit or implicit price concessions) that reduces the amount of consideration stated in the contract. For example, the transaction price for ntract price the items expected to be transferred may be less than the stated co for those items if an entity concludes that it has offered, or is willing to accept, a price concession on products sold to a customer as a means to assist the - consumers. As discussed in customer in selling those items through to end 61 IFRS 15.BC43. 62 IFRS 15.BC46E. 63 IFRS 5 Appendix A. 64 IFRS 15.BC46. 65 IFRS 15.BC46C. Updated October 2018 58 A closer look at IFRS 15, the revenue recognition standard

59 from the contract price any variable s deduct s 5.2.1.A, an entity ection consideration that would reduce the amount of consideration to which it expects to be entitled (e.g., the estimated price concession) at contract inception in order to derive the transaction p rice for those items. The standard provides the following example of how an entity would assess the collectability criterion: Extract from IFRS 15 Example 1 — Collectability of the consideration (IFRS 15.IE3 - IE6) into a contract with a customer for An entity, a real estate developer, enters the sale of a building for CU1 million. The customer intends to open a restaurant in the building. The building is located in an area where new restaurants face high levels of competition and the customer has little exp erience in the restaurant industry. The customer pays a non - refundable deposit of CU50,000 at inception of the contract and enters into a long - term financing agreement with the entity for the remaining 95 per cent of the promised consideration. The financ ing recourse basis, which means that if the arrangement is provided on a non - customer defaults, the entity can repossess the building, but cannot seek further compensation from the customer, even if the collateral does not cover the full value of the amou nt owed. The entity's cost of the building is CU600,000. The customer obtains control of the building at contract inception. paragraph 9 of In assessing whether the contract meets the criteria in 15, the entity concludes that the cr IFRS paragraph 9(e) of IFRS 15 is iterion in not met because it is not probable that the entity will collect the consideration to which it is entitled in exchange for the transfer of the building. In reaching this conclusion, the entity observes t hat the customer's ability and intention to pay may be in doubt because of the following factors: (a) t he customer intends to repay the loan (which has a significant balance) primarily from income derived from its restaurant business (which is a business faci ng significant risks because of high competition in the industry and the customer's limited experience); (b) he customer lacks other income or assets that could be used to repay t the loan; and t he customer's liability under the loan is limited because the loan is non - (c) recourse. Because the criteria in of IFRS 15 are not met, the entity applies paragraph 9 paragraphs 15 – 16 of IFRS 15 to determine the accounting for the non - refundable deposit of CU50,000. The entity observes that none of the events — that is, the entity has not received have occurred described in paragraph 15 substantially all of the consideration and it has not terminated the contract. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 59

60 Extract from IFRS 15 (cont’d) , the entity accounts for the paragraph 16 Consequently, in accordance with - refundable CU50,000 payment as a deposit liability. The entity continues non to account for the initial deposit, as well as any future payments of principal and interest, as a deposit liability, until such time that the entity concludes paragraph 9 are met (ie the entity is able to conclude that it that the criteria in is probable that the entity will collect the consideration) or one of the events paragraph 15 has occurred. The entity continues t o assess the contract in in paragraph 14 to determine whether the criteria in accordance with 9 are subsequently met or whether the events in paragraph 15 paragraph of IFRS 15 have occurred. What’s chang ed from legacy IFRS? legacy requirements in IAS 18, applying While this requirement is similar to the the concept to a portion of the contractual amount, instead of the total, is likely to be could be recognised under IAS a significant change. Before revenue 18, it had to be probable that the economic benefits associated with the transaction 66 would flow to the entity. the entire In practice, entities likely consider ed contractually agreed consideration under IAS 18. If so, the requirements in IFRS 15 could result in the earlier recognition of revenue for a contract in which ct price (but not the entire amount) considered to be at a portion of the contra is risk. How we see it Significant judgement is required to determine when an expected partial payment indicates that there is an implied price concession in the contract, there is an impairment loss or the arrangement lacks sufficient substance to be considered a contract under the standard. See ection 5.2.1.A for further s discussion on implicit price concessions. FASB differences ASC 606 also uses the term ‘probable’ for the collectability assessment. 67 However, ‘probable’ under US GAAP is a hi gher threshold than under IFRS. T he FASB standard includes additional guidance to clarify the intention of ’s the collectability assessment However, the IASB stated in the Basis for . Conclusions on IFRS 15 that it does not expect differences in outcomes under IFRS and US GAAP in relation to the evaluation of the collectability 68 criterion. 66 IAS 18.14(b), 18, 20(b). 67 For US GAAP, the term ‘probable’ is defined in the master glossary of the US Accounting Standards Codificiation as “the future event or events are likely to occur”. 68 IFRS 15.BC46E. Updated October 2018 60 A closer look at IFRS 15, the revenue recognition standard

61 Frequently asked questions Question 3 - 4 : How would an entity assess collectability for a portfolio of contracts? [TRG meeting 26 January 2015 — Agenda paper no. 13] TRG members generally agreed that if an entity has determined it is probable that a customer will pay amounts owed under a contract, but the entity has historical experience that it will not collect consideration from some of the customers within a portf s ection 3.3.1), it would olio of contracts (see be appropriate for the entity to record revenue for the contract in full and separately evaluate the corresponding contract asset or receivable for impairment. That is, the entity would not conclude the arra ngement contains an implicit price concession and would not reduce revenue for the uncollectable amounts. See s ection 5.2.1.A for a discussion of evaluating whether an entity has offered an implicit price concession. Consider the following example included in the TRG agenda paper: an entity has a large volume of similar customer contracts for which it invoices its customers in arrears, on a monthly basis. Before accepting a customer, the entity performs procedures designed to determine if it is probable tha t the c ustomer will pay the amounts owed. It does not accept customers if it is not probable that the customer will pay the amounts owed. Because these procedures are only designed to determine whether collection is probable (and, thus, not a certainty), the entity anticipates that it will have some customers that will not pay all of the amounts owed. While the entity collects the entire amount due from the vast majority of its customers, on average, the entity’s historical evidence (which is representativ e of its expectations for the future) indicates that the entity will only collect 98% of the amounts invoiced. In this case, the entity would recognise revenue for the full amount due and recognise a bad debt expense for 2% of the amount due (i.e., the ount the enti ty does not expect to collect). am In this example, the entity concludes that collectability is probable for each customer based on procedures it performed prior to accepting each customer and on its historical experience with this customer class , while also accepting that there is some credit risk inherent with this customer class. Furthermore, the entity concludes that any amounts not collected do not represent implied price concessions. Instead, they are due to general credit risk that was ent in a limited number of customer contracts. pres Some TRG members cautioned that the analysis to determine whether to recognise a bad debt expense for a contract in the same period in which revenue is recognised ession) will require d price conc (instead of reducing revenue for an anticipate judgement. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 61

62 Frequently asked questions (cont’d) 5 - : When would an entity reassess collectability? [TRG meeting Question 3 January 2015 26 Agenda paper no. 13] — s ection 3.1, IFRS 15 requires an entity to reassess whether As discussed in it is probable that it will collect the consideration to which it will be entitled when significant facts and circumstances change. Example 4 in IFRS 15 illustrates a situation in which a customer ’s financial condition declines and its current access to credit and available cash on hand is limited. In this case, the entity does not reassess the collectability criterion. However, in a subsequent year, the customer’s financial condition further decli nes after losing access illustrates that this to credit and its major customers. 4 in IFRS 15 xample E subsequent change in the customer’s financial condition is so significant that a reassessment of the criteria for identifying a contract is required, res ulting in the collectability criterion not being met. As noted in the TRG agenda paper, this example illustrates that it was not the Board’s intent to require an entity to reassess collectability when changes occur that are relatively minor , those that do not call into question the validity of the contract). in nature (i.e. TRG members generally agreed that entities need to exercise judgement to determine whether changes in the facts and circumstances are significant enough to indicate that a contract no lo nger exists. 3.2 Contract enforceability and termination clauses (updated October 2018) s (i.e., the stated of the contract to determine the An entity ha duration certain aspects of the contractual term or before apply ing a shorter period) revenue model (e.g., identifying performance obligations, determining the transaction price). The contract duration under IFRS 15 is the period in which parties to the contract have present enforceable rights and obligations . An ent ity cannot assume that there are present enforceable rights and obligations for the entire term stated in the contract and it is likely that an entity will have to consider enforceable rights and obligations in individual contracts , as described in the sta ndard: Extract from IFRS 15 11. Some contracts with customers may have no fixed duration and can be terminated or modified by either party at any time. Other contracts may automatically renew on a periodic basis that is specified in the contract. An entity shall apply this Standard to the duration of the contract (ie the contractual period) in which the parties to the contract have present enforceable rights and obligations. The period in which enforceable rights and obligations exist may be affected by termination provisions in the contract. Significant j ud gement will be required to determine the effect of termination provisions on the contract duration. Under the standard, t his determination is critical because t he contract duration to which the standard is applied may affect the number of performance obligations identified and the determination of the transaction price. It may also affect the 6 below See Question 3 - amounts disclosed in some of the required disclosures. for further discussion on how termination provisions may affect the contract duration. Updated October 2018 62 A closer look at IFRS 15, the revenue recognition standard

63 If each party has the unilateral right to terminate a ’wholly unperformed’ without comp (as defined in IFRS 15.12) ensating the counterparty, contract 15 states that, for purposes of the standard, a contract does not exist IFRS disclosure requirements would not apply. This is because and its accounting and the contracts would not affect an entity’s financial position or perfor mance until entity has not provided any either party performs. Any arrangement in which the of the contracted goods or services and has not received or is not entitled to receive any of the contracted consideration is considered to be a ‘wholly unperformed ’ contract. The requirements for ’wholly unperformed’ contracts do not apply if the parties to the contract have to compensate the other party if they exercise their right to terminate the contract and that termination payment is considered substantive. S ignificant judgement will be required to determine whether a termination payment is substantive and all facts and circumstances related to the contract should be considered. ed What’s chang legacy IFRS? from Evaluating termination provisions is a change from legacy IFRS. Under IAS 18, entities appl ied the revenue requirements for the stated term of the contract and generally account ed for terminations when they occur red . Under IFRS 15, ted terms as month entities be required to account for contracts with sta - would to month (or possibly a shorter duration) contracts if the parties can terminate - the contract without penalty. Frequently asked questions Question 3 - 6 : How do termination clauses and termination payments affect the duration of a contrac t (i.e., the contractual period)? [TRG meeting 31 October 2014 – Agenda paper no. 10] Entities need to carefully evaluate termination clauses and any related termination payments to determine how they affect contract duration ere are enforceable rights and obligations). (i.e., the period in which th TRG members generally agreed that enforceable rights and obligations exist throughout the term in which each party has the unilateral enforceable right For example, if to terminate the contract by compensating the other party. a contract includes a substantive termination payment, the duration of the contract would equal the period through which a termination penalty would be due . This could be the stated contractual term or a shorter duration if the termination penalty did not extend to the end of the contract. However, TRG members observed that the determination of whether a termination penalty is substantive, and what constitutes enf orceable rights and obligations under a contract, will require judgement and consideration of the facts and circumstances. The TRG agenda paper also noted that if an entity concludes f that the duration of the contract is less than the stated term because o a termination clause, any termination penalty should be included in the transaction price. If the termination penalty is variable, the requirements 5.2.3), would for variable consideration, including the constraint (see section be applied. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 63

64 Frequently asked questions (cont’d) a contract with a stated contractual term TRG members also agreed that if can be terminated by either party at any time for no consideration, the duration ends when control of the goods or services that have contract provided transfers to the customer (e.g., a month - to - month already been the contract’s stated contractual term. In this service contract), regardless of need to consider whether a contract includes a notification also case, e ntities or cancellation period (e.g., the co ntract can be terminated with 90 days’ notice) that would cause the contract duration to extend beyond the date when control of the goods or services that have already been provided were transferred to the customer. If such a period exists du ration , the contract would be shorter than the stated contractual term, but would extend beyond the date when control of the goods or services that have already been provided were transferred to the customer. Illustration 3 - 2 — D uration of contract without a termination penalty year contract with a customer to provide Entity A enters into a three - providing the services immediately. maintenance services . Entity A begin s Consideration is payable in equal monthly instalments, and each party terminate the contract without compensating has the unilateral right to the other party if it provides 30 days’ notice. Entity A may have considered the contract term to be three years While historically, its rights and obligations are enforceable only for 30 days. - contract would be accounted for as a one Under IFRS 15, the month contract with a renewal option for additional months of maintenance services. This is because the customer or Entity A could cancel the agreement with 30 days’ notice without paying a substantive termination payment. need to evaluate the accounting for the renewal Entity A would also whether option(s) to determine it is a material right (see section 4.6). Question 3 7 : How should an entity evaluate the contract term when only - the customer has the right to cancel the contract without cause and how do termination penalties affect this analysis? [TRG meeting 9 November 2015 – Agenda paper no. 48] Enforceable rights and obligations exist throughout the term in which each party has the unilateral enforceable ri ght to terminate the contract by compensating the other party. Members of the TRG did not view a customer - only right to terminate sufficient to warrant a different conclusion than one in which both parties have the right to terminate, as discussed in Quest ion 3 - 8 . TRG members generally agreed that a substantive termination penalty payable by a customer to the entity is evidence of enforceable rights and obligations of both parties throughout the period covered by the termination year service contract in which the - penalty. For example, consi der a four customer has the right to cancel without cause at the end of each year, but for which the customer would incur a termination penalty that decreases erally each year and is determined to be substantive. TRG members gen agreed that the arrangement would be treated as a four year contract. - Updated October 2018 64 A closer look at IFRS 15, the revenue recognition standard

65 Frequently asked questions (cont’d) TRG members also discussed situations in which a contractual penalty would result in including optional goods or services in the accounting for the original ection 4.6). 1 in contract (see Question 4 3 - s TRG members observed that the determination of whether a termination penalty is substantive, and what constitutes enforceable rights and obligations under a contract, will require judgement and consideration of the facts and circumstances. it is possible that payments that In addition, effectively act as a termination penalty and create or negate enforceable rights and obligations may not be label ed as such in a contract. T he TRG l agenda paper included an illustration in which an entity sells equipment an d consumables. The equipment is sold at a discount, but the customer is required to repay some or all of the discount if it does not purchase a minimum number of consumables. The TRG paper concludes that the penalty (i.e., forfeiting the upfront discount) is substantive and would be evidence of enforceable rights and obligations up to the minimum quantity. This example is discussed further in Question 4 - 1 3 of section 4.6. If enforceable rights and obligations do not exist throughout the entire term stated in the contract, TRG members generally agreed that customer cancellation rights would be treated as customer options. Examples include when there are no (or non - substantive) contractual penalties that compensate the entity upon cancellation and when the customer has the unilateral right to terminate the contract for reasons other than cause or contingent events outside the customer’s control. In the Basis for C onclusions, the Board noted that a cancellation option or termination right 69 can be similar to a An entity would need to determine renewal option. whether a cancellation option indicates that the customer has a material right that would need to be accounted for as a performance obligation (e.g., there is a discount for goods or services provided dur ing the cancellable period that provides the customer with a material right) (see s ection 4.6 for further discussion on customer options and the determination of whether an option ). represents a material right Question 3 - 8 : If an entity has a past practic e of not enforcing termination payments, does this affect the duration of the contract (i.e., the contractual period)? [TRG meeting 31 October 2014 – Agenda paper no. 10] The TRG agenda paper noted that the evaluation of the termination payment in determin ing the duration of a contract depends on whether the law (which may vary by jurisdiction) would consider past practice as limiting the parties’ enforceable rights and obligations. An entity’s past practice of allowing customers to terminate the contract e arly without enforcing collection of the termination payment only affects the contract in cases in which duration the parties’ legally enforceable rights and obl igations are limited because of the lack of enforcement by the entity. If that past practice d oes not change the parties’ legally enforceable rights and obligations, the contract duration should equal the period throughout which a substantive termination penalty would be due (which could be the stated contractual term or a shorter duration if the termination penalty did not exte nd to the end of the contract). 69 IFRS 15.BC391. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 65

66 Frequently asked questions (cont’d) 9 Question 3 - : How would an entity account for a partial termination of a contract (e.g., a change in the contract term from three years to two years prior to the beginning of year two)? We believe an entity should account for the partial termination of a contract ection 3.4) because it results in a change in as a contract modification (see s the scope of the contract. IFRS 15 states that “a contract modifica tion exists when the parties to a contract approve a modification that either creates new or changes existing enforceable rights and obligations of the parties to 70 the contract”. A partial termination of a contract results in a change to the enforceable r ights and obligations in the existing contract. This conclusion is consistent with the TRG agenda paper no. 48, which states, “a substantive termination penalty is evidence of enforceable rights and obligations throughout the contract term. The terminatio n penalty is ignored until the contract is terminated at which point it will be accounted for as a 71 modification”. Consider the following example: An entity enters into a contract with a customer to provide monthly a fixed price of CU500 per month maintenance services for three years at total consideration of CU18,000). The contract includes a termination (i.e., clause that allows the customer to cancel the third year of the contract by ve paying a termination penalty of CU1,000 (which is considered substanti for the purpose of this example). The penalty would effectively result in an adjusted price per month for two years of CU542 (i.e., total consideration of CU13,000). At the end of the first year, the customer decides to cancel ontract and pays the CU1,000 termination penalty the third year of the c specified in the contract. In this example, the modification would not be accounted for as a separate contract because it does not result in the addition of distinct goods or services (see s ection 3.4.2). Si nce the remaining services are distinct, the entity would apply the requirements in IFRS 15.21(a) and account for the modification prospectively. The remaining consideration of CU7,000 (CU6,000 per year under the original contract for the second year, pl us the CU1,000 payment upon modification) would be recognised over the remaining revised contract period of one year. That is, the entity would recognise the CU1,000 termination penalty over the remaining performance period. 70 IFRS 15.18. 71 dated Customer options for additional goods and services, TRG Agenda paper no. 48, , paragraph 47a. November 2015 9 Updated October 2018 66 A closer look at IFRS 15, the revenue recognition standard

67 3.3 Combining contracts October 2018) (updated In most cases, entities apply the model to individual contracts with a customer. However, the standard contracts entered into at, or requires entities to combine near, the same time with the same customer (or related parties of the customer if they meet one or more of the ) as defined in IAS 24 Related Party Disclosures 72 criteria below: • The contracts are negotiated together with a single commercial objective The consideration to be paid for one contract is dependent on the price or • rformance of another contract pe • The goods or services promised in the contracts are a single performance obligation (see section 4) In the Basis for Conclusions, the Board explained that it included the ause, in some cases, requirements on combining contracts in the standard bec the amount and timing of revenue may differ depending on whether an entity 73 accounts for contracts as a single contract or separately. Entities need to apply judgement to determine whether contracts are entered time because the standard does not provide a bright into at or near the same line for making this assessment. In the Basis for Conclusions, the Board noted that the longer the period between entering into different contracts, the more likely it is that the economic circumstances affecting the negotiations of those 74 contracts will have changed. Negotiating multiple contracts at the same time is not sufficient evidence to demonstrate that the contracts represent a single arrangement for accounting purposes. In the Basis for Conclusi ons, the Board noted that there are pricing interdependencies between two or more contracts when either of the first two criteria (i.e., the contracts are negotiated with a single commercial objective or the price in one contract depends on the price or p erformance of the other contract) are met, so the amount of consideration allocated to the performance obligations in each contract may not faithfully depict the value of the goods or services transferred to the customer if those contracts were not combine d. The Board also explained that it decided to include the third criterion (i.e., the goods or services in the contracts are a single performance obligation) to avoid any structuring opportunities that would effectively allow entities to bypass the 75 requir That is, an entity ements for identifying performance obligations. , cannot avoid determining whether multiple promises made to a customer at , or near the same time need to be bundled into one or more performance obligations in accordance with Step 2 of t he model (see section 4) solely by including the promises in separate contracts. What’s chang ed from legacy IFRS? IFRS 15 provides more requirements on when to combine contracts than the d legacy requirements in IAS 18. IAS 18 indicate that the recognition criteria should be applied to two or more transactions on a combined basis “when they are linked in such a way that the commercial effect cannot be understood without 76 reference to the series of transactions as a whole”. the legacy The IFRS 15 contract combination requirements are similar to in IAS 11, but there are some notable differences. IAS 11 allow ed requirements 72 IFRS 15.BC74 73 IFRS 15.BC71. 74 IFRS 15.BC75. 75 IFRS 15.BC73. 76 IAS 18.13. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 67

68 an entity to combine contracts with several customers, provided the relevant criteria for combination met. In contrast, the contract combination wer e same customer or requirements in IFRS 15 only apply to contracts with the related parties of the customer. Unlike IFRS 15, IAS 11 not require that did contracts be entered into at or near the same time. lso require d that all criteria be met before contracts can be combined, IAS 11 a while IFRS 15 requires that one or more of its criteria to be met. The criteria for combination in the two standards are similar. The main difference is the criterion in IFRS 15.17(c), which considers a performance obligation across different ed 11 consider contracts. In contrast, IAS concurrent or sequential 77 performance. Overall, the criteria are generally consistent with the underlying principles in the legacy revenue standards on c ombining contracts. However, since IFRS 15 explicitly requires an entity to combine contracts if one or more of the criteria in IFRS 15.17 are met, some entities that have not combine d contracts in the past may need to do so. 3.3.1 Portfolio approach pract ical expedient Under the standard, the five - step model is applied to individual contracts with customers , unless the contract combination requirements discussed in section are met . However, the IASB recognised that there may be situations in 3.3 which it m ay be more practical for an entity to group contracts for revenue recognition purposes rather than attempt to account for each contract separately. Specifically, the standard includes the following practical expedient: Extract from IFRS 15 4. This Standard specifies the accounting for an individual contract with a customer. However, as a practical expedient, an entity may apply this Standard to a portfolio of contracts (or performance obligations ) with asonably expects that the effects on similar characteristics if the entity re the financial statements of applying this Standard to the portfolio would not differ materially from applying this Standard to the individual contracts ing for a (or performance obligations) within that portfolio. When account portfolio, an entity shall use estimates and assumptions that reflect the size and composition of the portfolio. In order to use the portfolio approach, an entity must reasonably expect that the accounting result will not be materially differen t from the result of applying the standard to the individual contracts. However, in the Basis for Conclusions, the Board noted that it does not intend for an entity to quantitatively evaluate every possible outcome when concluding that the portfolio approa ch is not materially different. Instead, they indicated that an entity should be able to take a reasonable approach to determine the portfolios that would be representative of its types of customers and that an entity should use judgement in selecting 78 size and composition of those portfolios. the 77 IAS 11.9(c). 78 IFRS 15.BC69. Updated October 2018 68 A closer look at IFRS 15, the revenue recognition standard

69 How we see it Application of the portfolio approach will likely vary based on the facts and circumstances of each entity. A n entity may choose to apply the portfolio approach to only certain aspects of the model (e.g., determining the . transaction price in Step 3) Frequently asked questions Question 3 - 0 : How would an entity assess collectability for a portfolio of 1 contracts? [TRG meeting 26 January 2015 – Agenda paper no. 13] See response to Question 3 - 4 in s ection 3.1.5 . 3.4 Contract modifications (updated October 2018) Parties to an arrangement frequently agree to modify the scope or price (or both) of their contract. If that happens, an entity must determine whether new contract or as part of the existing the modification is accounted for as a contract. Generally, it is clear when a contract modification has taken place, but in some circumstances, that determination is more difficult. To assist entities he following: when making this determination, the standard states t Extract from IFRS 15 18. A contract modification is a change in the scope or price (or both) of a contract that is approved by the parties to the contract. In some industries and jurisdictions, a contract modification may be described as a change order, a variation or an amendment. A contract modification exists when the parties to a contract approv e a modification that either creates new or changes existing enforceable rights and obligations of the parties to the contract. A contract modification could be approved in writing, by oral agreement or implied by customary business practices. If the par ties to the contract have not approved a contract modification, an entity shall continue to apply this Standard to the existing contract until the contract modification is approved. 19. A contract modification may exist even though the parties to the contr act have a dispute about the scope or price (or both) of the modification or the parties have approved a change in the scope of the contract but have not yet determined the corresponding change in price. In determining whether the rights and obligations that are created or changed by a modification are enforceable, an entity shall consider all relevant facts and circumstances including the terms of the contract and other evidence. If the parties to a contract have approved a change in the scope of the co ntract but have not yet determined the corresponding change in price, an entity shall estimate the change to the transaction price arising from the modification in accordance with paragraphs 50 – 54 on estimating variable consideration 58 and paragraphs 56 on constraining estimates of variable consideration. – A closer look at IFRS 15, the revenue recognition standard Updated October 2018 69

70 The extract above illustrates that the Board intended these requirements to 15 apply more broadly than only to finalised modifications. That is, IFRS indicates that an entity may have to account for a contract modification prior to the parties reaching fi nal agreement on changes in scope or pricing (or both). Instead of focusing on the finalisation of a modification, IFRS 15 focuses on the enforceability of the changes to the rights and obligations in the contract. hts and obligations are enforceable, Once an entity determines the revised rig it accounts for the contract modification. The standard provides the following example to illustrate this point: Extract from IFRS 15 Example 9 — Unapproved change in scope and price (IFRS 15.IE42 - IE43) An entity enters into a contract with a customer to construct a building on - owned land. The contract states that the customer will provide the customer entity with access to the land within 30 days of contract inception. However, the entity was not provide d access until 120 days after contract inception because of storm damage to the site that occurred after contract inception. The contract specifically identifies any delay (including force majeure ) in the entity’s access to customer - owned land as an event that entitles the entity to compensation that is equal to actual costs incurred as a direct result of the delay. The entity is able to demonstrate that the specific direct costs were incurred as a result of the delay in accordance with the terms of the con tract and prepares a claim. The customer initially disagreed with the entity’s claim. The entity assesses the legal basis of the claim and determines, on the basis of the underlying contractual terms, that it has enforceable unts for the claim as a contract modification in rights. Consequently, it acco – 21 of IFRS 15. The modification does not accordance with paragraphs 18 result in any additional goods and services being provided to the customer. In addition, all of the remaining goods and services after the modification are not distinct and form part of a single performance obligation. Consequently, the entity accounts for the modification in accordance with paragraph 21(b) of IFRS 15 by updating the transaction price and the measure of progress towards c omplete satisfaction of the performance obligation. The entity considers the constraint on estimates of variable consideration in paragraphs 56 – 58 of IFRS 15 when estimating the transaction price. Once an entity has determined that a contract has been mod ified, the entity determines the appropriate accounting treatment for the modification. Certain modifications are treated as separate stand - alone contracts, while others are combined with the original contract and accounted for in that manner. In additio n, some modifications are accounted for on a prospective basis and others on a cumulative catch - up basis. The Board developed different approaches to account for different types of modifications with an overall objective of faithfully depicting an entity’ s rights and obligations in each 79 modified contract. 79 IFRS 15.BC76. Updated October 2018 70 A closer look at IFRS 15, the revenue recognition standard

71 The standard includes the following requirements for determining the appropriate accounting treatment: Extract from IFRS 15 contract 20. An entity shall account for a contract modification as a separate if both of the following conditions are present: (a) he scope of the contract increases because of the addition of promised t goods or services that are distinct (in accordance with paragraphs 26 – 30); and (b) t he price of the contract increases by an amoun t of consideration that reflects the entity’s stand alone selling prices of the additional promised - goods or services and any appropriate adjustments to that price to reflect the circumstances of the particular contract. For example, an entity may adjust t he stand - alone selling price of an additional good or service for a discount that the customer receives, because it is not necessary for the entity to incur the selling - related costs that it would incur when selling a similar good or service to a new custo mer. 21. If a contract modification is not accounted for as a separate contract in accordance with paragraph 20, an entity shall account for the promised goods or services not yet transferred at the date of the contract modification (ie the remaining promised goods or services) in whichever of the following ways is applicable: (a) An entity shall account for the contract modification as if it were a termination of the existing contract and the creation of a new contract, if the remaining goods or services are distinct from the goods or services transferred on or before the date of the contract modification. The amount of consideration to be allocated to the remaining performance obligations (or to the remaining distinct goods or services in a single perfor mance obligation identified in accordance with paragraph 22(b)) is the sum of: (i) t he consideration promised by the customer (including amounts already received from the customer) that was included in the estimate of the transaction price and that had not bee n recognised as revenue; and t he (ii) consideration promised as part of the contract modification. An entity shall account for the contract modification as if it were a part (b) of the existing contract if the remaining goods or services are not distinct and, therefore, form part of a single performance obligation that is partially satisfied at the date of the contract modification. The effect that the contract modification has on the transaction price, and on the entity’s measure of progress towards complete s atisfaction of the performance obligation, is recognised as an adjustment to revenue (either as an increase in or a reduction of revenue) at the date of the contract modification (ie the adjustment to revenue is made on a cumulative catch - up basis). remaining goods or services are a combination of items (a) and (b), (c) If the then the entity shall account for the effects of the modification on the unsatisfied (including partially unsatisfied) performance obligations in the modified contract in a manner that i s consistent with the objectives of this paragraph. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 71

72 The following chart illustrates these requirements: Continue to account for the Have the parties approved a existing contract and do not modification that changes the account for the contract (or both) of the scope or price No modification until approved. contract? * Yes Is the contract modification for additional goods or and services that are distinct - at their stand alone selling price?* * Yes No Account for the new goods services as a or separate contract. Are the Update the transaction price and measure of remaining services goods or progress for the single performance obligation distinct from those up to (recognise change as a cumulative catch - No revenue). already provided? Yes Both yes and no Update the transaction price and allocate it Treat the modification as a termination of to t he remaining performance obligations the existing contract and the creation of a (both from the existing contract and the new contract. Allocate the total remaining modification). Adjust revenue previously transaction price (unrecognised recognised based on an updated measure of transaction price from the existing progress for the partially satisfied nsaction price contract plus additional tra performance obligations. Do not adjust the from the modification) to the remaining completed performance accounting for or goods services (both from the existing obligations that are distinct from the contract and the modification). modified goods or services. * Under IFRS 15 , a contract modification can be approved in writing, by oral agreement or implied by customary business practices. IFRS 15.19 states that an entity may have to account for a contract modification prior to the parties reaching final agreement on change s in scope or pricing (or both), provided the rights and obligations that are created or changed by a modification are enforceable . ty may make appropriate adjustments to the stand * * alone - In accordance with IFRS 15.20, an enti selling price to reflect the circumstances of the contract and still meet the criteria to account for the modification as a separate contract. When assessing how to account for a contract modification, an entity must consider whether any additional goods or services are distinct, often giving careful consideration to whether those goods or services are distinct within the context of the modified contract (see s ections 4.2.1 for further discussion on e valuating whether goods or services are distinct). That is, although a contract modification may add a new good or service that would be distinct in - a stand alone transaction, that new good or service may not be distinct when considered in the context of the contract, as modified. For example, in a building renovation project, a customer may request a contract modification to add a new The construction firm may commonly sell the construction of an added room. te that the service is capable of alone basis, which would indica - room on a stand being distinct. However, when that service is added to an existing contract and the entity has already determined that the entire project is a single performance 72 A closer look at IFRS 15, the revenue recognition standard Updated October 2018

73 obligation, the added goods or mbined with the services would normally be co services. or existing bundle of goods In contrast to the construction example (for which the addition of otherwise distinct goods or services are combined with the existing single performance obligation and accounted for in that manner), a contract modification that adds distinct goods or services to a single performance obligation that is a series s ection 4.2.2) is accounted for either as of distinct goods or services (see a separate contract or as the termination of the old contract and the creation of a new contract (i.e., prospectively). In the Basis for Conclusions, the Board explained that it clarified the accounting for modifications that affect a single performance o bligation that is made up of a series of distinct goods or services (e.g., repetitive service contracts) to address some stakeholders’ concerns that an entity otherwise would have been required to account for 80 these modifications on a cumulative catch - up b asis. As illustrated in Example 5, Case B (see section 3.4.2), a contract modification may include compensation to a customer for performance issues (e.g., poor service by the entity, defects present in transferred goods). An entity may need to account fo r the compensation to the customer as a change in the transaction price (see section 6.5) separate from other modifications to the contract. What’s chang ed from legacy IFRS? The requirement to determine whether to treat a change in contractual terms as a separate contract or a modification to an existing contract is similar to 81 legacy requirements in IAS the 11 for construction contracts. In contrast, IAS 18 d id not provide detailed application guidance on how to determine whether a change in contractual terms should be treated as a separate contract or a modification to an existing contract. Despite there being some similarities legacy to IFRS, the requirements in IFRS 15 for contract modifications are much more detailed. Therefore, the requirements in IFRS 15 could result in a change in practice for some entities. Before adopting IFRS 15 , e ntities should evaluate whether their previous pro cesses and controls for contract modifications need to be updated for the new requirements. 80 IFRS 15.BC79. 81 IAS 11.13. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 73

74 Frequently asked questions Question 3 - 1 1 : When would an entity evaluate a contract under the contract modification requirements ? An entity typically enters into a separate contract with a customer to provide additional goods or services. Stakeholders had questioned whether a new contract with an existing customer needs to be evaluated under the contract modification . requirements A new contract with an existing customer needs to be evaluated under the contract modification requirements if the new contract results in a change in the scope or price of the original contract. IFRS 15.18 states that “a contract modification exists when the parties to a contract approve a modification that either creates new or changes existing enforceable rights and obligations of the parties to the contract”. Therefore, an entity needs to evaluate whether a new contract with an existing customer repres ents a legally enforceable change in scope or price to an existing contract. In some cases, the determination of whether a new contract with an existing customer creates new or changes existing enforceable rights and obligations ause the new contract does not contemplate goods will be straightforward bec or services in the existing contract, including the pricing of those goods or services. Purchases of additional goods or services under a separate contract g contract would not need that do not modify the scope or price of an existin to be evaluated under the contract modification requirements. Rather, they would be accounted for as new (separate) contract. In other cases, the determination of whether a new contract is a modification of an existing contract wi ll require judgement. In such circumstances, we believe an entity should consider the specific facts and circumstances surrounding the new contract in order to determine whether it represents a contract modification. This could include considering factor s such as those included in the contract combination requirements (see section 3.3): • Whether the contracts were negotiated as a package with a single commercial objective (this might be the case in situations where the modifications). existing contract contemplates future • Whether the amount of consideration to be paid in one contract depends on the price or performance of the other contract. • Whether the goods or services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation. If the pricing in the new contract is dependent on the original contract, or if the terms of the new contract are in some other way negotiated based on the original contract, it is likely that the new contract needs t o be evaluated under the contract modification requirements. Updated October 2018 74 A closer look at IFRS 15, the revenue recognition standard

75 Frequently asked questions (cont’d) - 1 : When an arrangement that has already been determined to Question 3 2 meet the standard’s contract criteria is modified, would an entity need to reassess whether that arrangement still meets the criteria to be considered a contract within the scope of the model in the standard? There is no specific requirement in the standard to reconsider whether a contract meets the definition of a contract when it is modified. However, if a contract is modified, we believe that may indicate that “a significant change in facts and circumstances” has occurred (see ection 3.1) and that the entity s should reassess the criteria in IFRS 15.9 for the modified contract. Any reassessment is prospective in nature and would not change the conclusions or associated with goods transferred. That is, an entity would services already not reverse any receivables, revenue or contract assets already recognised under the contract because of the reassessment of the contract criteria in IFRS 15.9. However, due to the contract modification accounting (see s ection 3.4.2), the entity may need to adjust contract assets or cumulative revenue recognised in the period of the contract modification. - 3 : How would an entity account for the exercise of a material Question 3 1 right? That is, would an entity account for it as: a contract modification, a continuation of the existing contract or variable consideration? [TRG meeting 30 March 2015 – Agenda paper no. 32] See response to Question 4 - 1 7 in s ection 4.6. Question 3 - 1 4 : How sh ould entities account for modifications to licences of intellectual property? See response to Question 8 ection 8.1.4. - 1 in s 3.4.1 Contract modification represents a separate contract dated October (up 2018) 82 For Certain contract modifications are treated as separate, new contracts. these modifications, the accounting for the original contract is not affected by the modification and the revenue recognised to date on the original contract is not adjusted. Furthermore, any performance obligations remaining under the original contract continue to be accounted for under the original contract. The accounting for this modification approach reflects the fact that there is no economic differenc e between a separate contract for additional goods or services and a modified contract for those same items, provided the two criteria required for this modification approach are met. The first criterion that must be met for a modification to be treated as a separate contract is that the additional promised goods or services in the modification must be distinct from the promised goods or services in the original contract. This assessment is done in accordance with IFRS 15’s general ining whether promised goods or services are distinct requirements for determ (see ection 4.2.1). Only modifications that add distinct goods or services to s the arrangement can be treated as separate contracts. Arrangements that reduce the amount of promised goods or services or change the scope of the original promised goods services cannot, by their very nature, be or considered separate contracts. Instead, they would be considered modifications 83 s ection 3.4.2). of the original contract (see 82 IFRS 15.20. 83 IFRS 15.20(a). A closer look at IFRS 15, the revenue recognition standard Updated October 2018 75

76 The second criterion is that the am ount of consideration expected for the added alone selling prices of those - promised goods or services must reflect the stand promised goods or services. However, when determining the stand - alone selling tand - alone selling price, price, entities have some flexibility to adjust the s n entity may give an depending on the facts and circumstances. For example, a entity would not existing customer a discount on additional goods because the - related costs that it would typically incur for new customers . In this incur selling example, the entity may determine that the additional transaction consideration meets the criterion, even though the discounted price is less than the stand - alone selling price of that good or service for a new customer. In another example, an en tity may conclude that, with the additional purchases, the customer qualifies for a volume based discount (see Questions 4 - 1 2 and 4 - 1 3 - in 84 s . ection 4.6 on volume discounts) In situations with highly variable pricing, determining whether the additional consideration in a modified contract reflects the stand - alone selling price for the additional goods or services may not be straightforward. Entities need to apply ment when making this assessment. Evaluating whether the price in the judg e or service modified contract is within a range of prices for which the good s s are typically sold to similar customers may be an acceptable approach. The following example illustrates a contract modification that represents a separate contract: Extract from IFRS 15 Example 5 — Modification of a contract for goods (IFRS 15.IE19 - IE21) An entity promises to sell 120 products to a customer for CU12,000 (CU100 - month per product). The products are transferred to the customer over a six period. The entity transfers control of each product at a point in time. After the entity has transferred control of 60 products to the customer, the contract is modified to require the delivery of an additional 30 products (a total of 150 identical products) to the customer. The additional 3 0 products were not included in the initial contract. - Case A — Additional products for a price that reflects the stand alone selling price When the contract is modified, the price of the contract modification for the additional 30 products is an additional CU2,850 or CU95 per product. - alone selling price The pricing for the additional products reflects the stand of the products at the time of the contract modification and the additional products are distinct (in accordance with paragraph 27 of IFRS 15) from the original products. In accordance with paragraph 20 of IFRS 15, the contract modification for the additional 30 products is, in effect, a new and separate contract for future products that does not affect the accounting for the existing contract. The entity recognises revenue of CU100 per product for the 120 products in the original contract and C U95 per product for the 30 products in the new contract. 84 IFRS 15.20(b). Updated October 2018 76 A closer look at IFRS 15, the revenue recognition standard

77 3.4.2 Contract modification is not a separate contract ection 3.4.1 are not met s In instances in which the criteria discussed in ( ds or services i.e., distinct goods or services are not added or the distinct goo - alone selling price), contract modifications are are not priced at their stand changes to the original contract and not as separate contracts. accounted for as - This includes contract modifications that modify or remove previously agreed upon goods or services or reduce the price of the contract . An entity would account for the effects of these modifications differently, depending on which 3.3) of the three scenarios described in IFRS s ection 15.21 (see the extract in most closely aligns with the facts and circumstances of the modification. If the remaining goods or services after the contract modification are distinct from the goods or services transferred on, or before, the contract modification, the entity accounts for the modification as i f it were a termination of the old contract and the creation of a new contract. For these modifications, the revenue recognised to date on the original contract (i.e., the amount associated ad, the with the completed performance obligations) is not adjusted. Inste remaining portion of the original contract and the modification are accounted for, together, on a prospective basis by allocating the remaining consideration (i.e., the unrecognised transaction price from the existing contract plus transaction price from the modification) to the remaining the additional performance obligations, including those added in the modification. This scenario is illustrated as follows: Extract from IFRS 15 — Modification of a contract for goods (IFRS 15.IE19, IE22 - Example 5 IE24) An entity promises to sell 120 products to a customer for CU12,000 (CU100 per product). The products are transferred to the customer over a six - month period. The entity transfers control of each product at a point in time. After the entity has t ransferred control of 60 products to the customer, the contract is modified to require the delivery of an additional 30 products (a total of 150 identical products) to the customer. The additional 30 products were not included in the initial contract. Case B — Additional products for a price that does not reflect the stand - alone selling price During the process of negotiating the purchase of an additional 30 products, the parties initially agree on a price of CU80 per product. However, the customer discov ers that the initial 60 products transferred to the customer contained minor defects that were unique to those delivered products. The entity promises a partial credit of CU15 per product to compensate the customer for the poor quality of those products. The entity and the customer agree to incorporate the credit of CU900 (CU15 credit × 60 products) into the price that the entity charges for the additional 30 products. Consequently, roducts the contract modification specifies that the price of the additional 30 p is CU1,500 or CU50 per product. That price comprises the agreed - upon price for the additional 30 products of CU2,400, or CU80 per product, less the credit of CU900. At the time of modification, the entity recognises the CU900 as a reduction transaction price and, therefore, as a reduction of revenue for the of the initial 60 products transferred. In accounting for the sale of the additional 30 products, the entity determines that the negotiated price of CU80 per A closer look at IFRS 15, the revenue recognition standard Updated October 2018 77

78 Extract from IFRS 15 (cont’d) alone selling price of the additional - product does not reflect the stand products. Consequently, the contract modification does not meet the conditions in paragraph 20 of IFRS 15 to be accounted for as a separate contract. Because the remaining products to be delivered are distinct from those already transferred, the entity applies the requirements 21(a) of IFRS 15 and accounts for the modification as a in paragraph termination of the original contract and the creation of a new contract. amount recognised as revenue for each of the remaining Consequently, the products is a blended price of CU93.33 {[(CU100 × 60 products not yet transferred under the original contract) + (CU80 × 30 products to be products}. transferred under the contract modification)] ÷ 90 remaining In Example 5, Case B, in the extract above, the entity attributed a portion of the discount provided on the additional products to the previously delivered products because they contained defects. This is because the compensation provided to t he customer for the previously delivered products is a discount on i.e., those products, which results in variable consideration ( a price concession) em . The new discount on the previously delivered products for th was recognised as a reduction of the trans action price (and, therefore, revenue) on the date of the modification. Changes in the transaction price after contract 6.5). inception are accounted for in accordance with IFRS 15.88 - 90 (see section In similar situations, it may not be clear from the cha nge in the contract terms whether an entity has offered a price concession on previously transferred goods or services to compensate the customer for performance issues related ( to those items that would be accounted for as a reduction of the transaction that should be ( offered a discount on future goods or services has p or rice ) ) . An entity need s included in the accounting for the contract modification to apply judg e ment when performance issues exist for previously transferred goods or services to determi ne whether to account for any compensation to the customer as a change in the transaction price for those previously transferred goods or services. The remaining goods or services to be provided after the contract modification services already provided and, may not be distinct from those goods or therefore, form part of a single performance obligation that is partially satisfied at the date of modification. If this is the case, the entity accounts for the contract modification as if it were part of the original contract. The entity adjusts revenue previously recognised (either up or down) to reflect the effect that the contract modification has on the transaction price and update the measure of progress (i.e., the revenue adjustment is made on a cumulative - catch up basis). This scenario is illustrated as follows: Extract from IFRS 15 Example 8 — Modification resulting in a cumulative catch - up adjustment to revenue (IFRS 15.IE37 - IE41) An entity, a construction company, enters into a contract to construct a - owned land for promised commercial building for a customer on customer consideration of CU1 million and a bonus of CU200,000 if the building is s. The entity accounts for the promised bundle completed within 24 month of goods and services as a single performance obligation satisfied over time in accordance with paragraph 35(b) of IFRS 15 because the customer controls the building during construction. Updated October 2018 78 A closer look at IFRS 15, the revenue recognition standard

79 Extract from IFRS 15 (cont’d) At the inception of the contract, the entity expects the following: CU 1,000,000 Transaction price 700,000 Expected costs 300,000 Expected profit (30%) At contract inception, the entity excludes the CU200,000 bonus from the transaction price because it cannot conclude that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. Completion of the b uilding is highly susceptible to factors outside the entity’s influence, including weather and regulatory approvals. In addition, the entity has limited experience with similar types of contracts. of costs incurred, The entity determines that the input measure, on the basis provides an appropriate measure of progress towards complete satisfaction of the performance obligation. By the end of the first year, the entity has satisfied 60 per cent of its performance obligation on the basis of costs incurred to date (CU420,000) relative to total expected costs (CU700,000). The entity reassesses the variable consideration and concludes that the amount is still constrained in accordance with paragraphs 56 – 58 of IFRS 15. Consequently, the cumulative revenue and cost s recognised for the first year are as follows: CU Revenue 600,000 Costs 420,000 Gross profit 180,000 In the first quarter of the second year, the parties to the contract agree to modify the contract by changing the floor plan of the building. As a result, the fixed consideration and expected costs increase by CU150,000 and CU120,000, respectively. Total potential consideration after the modification is CU1,350,000 (CU1,150,000 fixed consideration + CU200,000 completion bonus). In addition, the allowable time for achieving the CU200,000 bonus is extended by 6 months to 30 months from the original contract inception date. At the date of the modification, on the basis of its experience and the remaining work to be performed, which is primarily inside the building and not subject to weather conditions, the entity concludes that it is highly probable that incl uding the bonus in the transaction price will not result in a significant reversal in the amount of cumulative revenue recognised in accordance with paragraph 56 of IFRS 15 and includes the CU200,000 in the transaction price. In assessing the contract modi fication, the entity evaluates 27(b) of IFRS 15 and concludes (on the basis of the factors paragraph in paragraph 29 of IFRS 15) that the remaining goods and services to be provided using the modified contract are not distinct from the goods and services transferred on or before the date of contract modification; that is, the contract remains a single performance obligation. Consequently, the entity accounts for the contract modification as if it were part of the original contract (in accordance with parag raph 21(b) of IFRS 15). The entity updates its measure of progress and estimates that it has satisfied 51.2 per cent of its performance obligation (CU420,000 actual costs incurred ÷ CU820,000 total expected costs). The entity recognises additional revenue of CU91,200 [(51.2 per cent complete × CU1,350,000 modified transaction CU600,000 revenue recognised to date] at the date of the price) – modification as a cumulative catch up adjustment. - A closer look at IFRS 15, the revenue recognition standard Updated October 2018 79

80 Finally, a change in a contract may also be treated as a combinatio n of the two: a modification of the existing contract and the creation of a new contract. In this case, an entity would not adjust the accounting treatment for completed performance obligations that are distinct from the modified goods or services. Howev er, the entity would adjust revenue previously recognised (either up or down) to reflect the effect of the contract modification on the estimated transaction price allocated to performance obligations that are not distinct from the modified portion of the contract and would update the measure of progress. Frequently asked questions Question 3 - 1 5 : How would an entity account for a contract asset that exists when a contract is modified if the modification is treated as the termination contract and the creation of a new contract? [FASB TRG of an existing meeting 18 April 2016 - Agenda paper no. 51] See response to Question 10 - 5 in s ection 10.1. 3.5 Arrangements that do not meet the definition of a contract October 2018) under the standard (updated an arrangement does not meet the criteria to be considered a contract under If the standard, it must be accounted for as follows: Extract from IFRS 15 15. When a contract with a customer does not meet the criteria in paragraph 9 and an entity receives consideration from the customer, the entity shall recognise the consideration received as revenue only when either of the following events has occurred: he entity has no remaining obligations to transfer goods or services to (a) t the customer and all, or substantially all, of the consideration promised by the customer has been received by the entity and is non - refundable; or (b) t he contract has been terminated and the consideration received from the customer is non - refundable. 16. An entity shall recognise the consideration received from a customer as a liability until one of the events in paragraph 15 occurs or until the criteria in paragraph 9 are subsequently met (see paragraph 14). Depending on relating to the contract, the liability recognised the facts and circumstances represents the entity’s obligation to either transfer goods or services in the future or refund the consideration received. In either case, the liability shall eceived from the customer. be measured at the amount of consideration r Updated October 2018 80 A closer look at IFRS 15, the revenue recognition standard

81 The following flow chart illustrates this requirement: Does the arrangement meet the criteria in Apply the remaining steps of the IFRS 15 to be considered a contract within - model to the contract (Steps 2 5) Yes the model in IFRS 15?* the scope of No Is the consideration received from the - customer non refundable? No Yes led its remaining Has the entity fulfil Yes obligations to the customer and has all (or substantially all) of the consideration No promised by the customer been received? No Yes Recognise consideration received Has the contract been terminated? as revenue No Recognise consideration received as a liability the term of the arrangement to * continue to assess the criteria throughout need to Entities determine whether they are subsequently met. Entities are required to continue to assess the criteria in IFRS 15.9 (as discussed in ection 3.1) throughout the term of the arrangement to determine s whether they are subsequently met. Once the criteria are met, the model in the standard applies, rather than the requirements discussed below. If an entity is met, revenue are subsequently IFRS 15.9 determines that the criteria in when up basis a contract exists as at the date - mulative catch ed on a cu recognis , within the scope of the model (i.e., at the ‘ con tract establishment date ’ at reflecting the performance obligations that are partially , or fully , satisfied date . This accounting is consistent with the discussion in TRG agenda that paper sfies no. 33, which states that the cumulative catch - up method “best sati 85 7 in section 7.1.4.C the core principle” in IFRS 15.2 for . S ee Question 7 - 1 further discussion). 15.9 (and until the criteria If an arrangement does not meet the criteria in IFRS ceived - refundable consideration re are met ), an entity only recognises non as revenue when one of the events outlined above has occurred (i.e., full all (or substantially all ) consideration received or the contract performance and has been terminated) or the arrangement subsequently meets the criteria in IFRS 15.9. one of these events happens, any consideration received from the Until customer is initially accounted for as a liability (not revenue) and the liability is measured at the amount of consideration received from the customer. In the Basis for Conclusions, the B oard indicated that it intended this accounting to be “similar to the ‘deposit method’ that was previously included in US GAAP 86 and applied when there was no consummation of a sale”. As noted in 85 TRG Agenda paper no. 33, Partial Satisfaction of Performance Ob ligations Prior to the Contract 2015. , dated 30 March Identifying 86 IFRS 15.BC48. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 81

82 the Basis for Conclusions, the Board decided to include the requirements 15.14 in IFRS 16 to prevent entities from seeking alternative guidance or - improperly analogising to the model in IFRS 15 in circumstances in which 87 an executed contract does not meet the criteria in IFRS 15.9. FASB differences Under the FASB’s standard , when the arrangement does not meet the criteria to be accounted for as a revenue contract under the standard , can an entity also recognise revenue (at the amount of the non - refundable consideration received when the entity has transferre d control of the goods ) or services and has stopped transferring (and has no obligation to transfer) additional goods or services. IFRS 15 does not include a similar requirement. However, t he IASB states in the Basis for Conclusions on IFRS 15 that contrac ts often specify that payment. - an entity has a right to terminate the contract in the event of non Furthermore, such clauses would not generally affect the entity’s legal rights to recover any amounts due. Therefore, the IASB concluded that the requireme 15 would allow an entity to conclude that a contract nts in IFRS 88 is terminated when it stops providing goods or services to the customer. Frequently asked questions Question 3 - 1 6 : When is a contract considered terminated for purposes of applying IFRS 15.15(b)? Determining whether a contract is terminated may require significant judgement. In the Basis for Conclusions on IFRS 15, “the IASB noted that contracts often specify that an entity has the right to terminate the contract in the event of - non payment by the customer and that this would not generally affect the entity’s rights to recover any amounts owed by the customer. The IASB also noted that an entity’s decision to stop pursuing collection would not typically and the customer’s obligations under the contract affect the entity’s rights with respect to the consideration owed by the customer. On this basis, ... the existing requirements in IFRS 15 are sufficient for an entity to conclude ... that a contract is terminated when it stops providing goods or services to 89 the customer.” 87 IFRS 15.BC47. 88 IFRS 15.BC46H. 89 IFRS 15.BC46H. Updated October 2018 82 A closer look at IFRS 15, the revenue recognition standard

83 4. Identify the performance obligations in the contract To apply the standard, an entity must identify the promised goods services or within the contract and determine which of those goods services are or the separate performance obligations. As noted in the Basis for Conclusions, Board developed the notion of a ’performance obligation’ to assist entities with the unit of account for the purposes of applying the appropriately identifying 90 Because the standard requires entities to allocate the transaction stand ard. price to performance obligations, identifying the correct unit of account is fundamental to recognising revenue on a basis that faithfully depicts the entity’s performance in transfer ring the promised goods or services to the customer. The standard provides the following requirements with respect to identifying the performance obligations in a contract: Extract from IFRS 15 or services 22. At contract inception, an entity shall assess the goods promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer either: (a) a good or service (or a bundle of goods or services) that is distinct; or (b) a series of distinct goods or servi ces that are substantially the same and that have the same pattern of transfer to the customer (see paragraph 23). 23. A series of distinct goods or services has the same pattern of transfer to the customer if both of the following criteria are met: (a) e ach distinct good or service in the series that the entity promises to transfer to the customer would meet the criteria in paragraph 35 to be a performance obligation satisfied over time; and (b) i n accordance with paragraphs 39 – 40, the same method would be used to measure the entity’s progress towards complete satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer. 4.1 Identifying the promised goods or services in the contract ( updated October 2018) As a first step in identifying the performance obligation(s) in the contract, the standard requires an entity to identify, at contract inception, the promised services in the contract. However, unlike goods or IFRS, which d id not legacy define elements/de liverables, the standard provides guidance on the types of items that may be goods or services promised in the contract, as follows: Extract from IFRS 15 Promises in contracts with customers 24. A contract with a customer generally explicitly states the goods or services that an entity promises to transfer to a customer. However, the 90 IFRS 15.BC85. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 83

84 Extract from IFRS 15 (cont’d) performance obligations identified in a contract with a customer may not be limited to the goods or services that are explicitly stated in that contract. This is because a contract with a customer may also include promises that implied by an entity’s customary business practices, published policies are if, at the time of entering into the contract, those or specific statements promises create a valid expectation of the customer that the entity will transfer a good or service to the customer. 25. Performance obligations do not include activities that an entity must fulfil a contract unless those activities transfer a good or service undertake to to a customer. For example, a services provider may need to perform various administrative tasks to set up a contract. The performance of those tasks ustomer as the tasks are performed. does not transfer a service to the c Therefore, those setup activities are not a performance obligation. Distinct goods or services 26. Depending on the contract, promised goods or services may include, but are not limited to, the following: s ale (a) of goods p roduced by an entity (for example, inventory of a manufacturer); (b) r esale of goods purchased by an entity (for example, merchandise of a retailer); (c) r esale of rights to goods or services purchased by an entity (for example, a ticket resold by an entity actin g as a principal, as described in paragraphs B34 – B38); (d) p erforming a contractually agreed - upon task (or tasks) for a customer; roviding (e) p a service of standing ready to provide goods or services (for on a when example, unspecified updates to software that are provided - and - - available basis) or of making goods or services available for if a customer to use as and when the customer decides; p roviding a service of arranging for another party to transfer goods or (f) services to a customer (for example, acting as an a gent of another party, as described in paragraphs B34 – B38); (g) g ranting rights to goods or services to be provided in the future that a customer can resell or provide to its customer (for example, an entity selling a product to a retailer promises to transfe r an additional good or service to an individual who purchases the product from the retailer); (h) c onstructing , manufacturing or developing an asset on behalf of a customer; (i) g ranting licences (see paragraphs B52 – B63B); and (j) g ranting options to purchase additional goods or services (when those options provide a customer with a material right, as described in paragraphs B39 – B43). In order for an entity to identify the promised goods or services in a contract, that an entity would indicates consider whether there is a valid IFRS 15 .24 expectation on the part of the customer that the entity will provide a good or service. If the customer has a valid expectation that it will receive certain goods or services, it would likely view tho se promises as part of the negotiated Updated October 2018 84 A closer look at IFRS 15, the revenue recognition standard

85 exchange. This expectation most commonly created from an entity’s explicit is promises in a contract to transfer goods or services to the customer. e However, in other cases, promises to provide goods or services might b implied by the entity’s customary business practices or standard industry norms section 3, the Board (i.e., outside of the written contract). As discussed in clarified that, while the contract must be legally enforceable to be within the enue model, not all of the promises (explicit or implicit) have scope of the rev to be legally enforceable to be considered when determining the entity’s 91 That is, a performance obligation can be based on performance obligations. e to the entity’s business practice of a customer’s valid expectations (e.g., du . providing an additional good or service that is not specified in the contract) In addition, some items commonly considered to be marketing incentives have esent promised to be evaluated under IFRS 15 to determine whether they repr or services in the contract. Such items may include ‘free’ handsets goods provided by telecommunication entities, ‘free’ maintenance provided by automotive manufacturers and customer loyalty points awarded by 92 s. supermarkets, airlines and hotel Although an entity may not consider those goods or services to be the ‘main’ items that the customer contracts to receive, the Board concluded that they are goods or services for which the customer pays and to which the entity would allocate consideration for the purpose of 93 recognising revenue. that promised goods or services do IFRS 15.25 states include activities that not an entity must undertake to fulfil a contract unless those activities transfer control of a good or service to a customer. For example, internal administrative activities that an entity must perform to satisfy its obligation to deliver the promised goods o r services , but do not transfer control of a good or service to a customer, would not be promised goods or services . An entity may have to apply judg e ment when determining whether an activity it will perform is a promised good or service that will be tr ansferred to a customer. The following questions may be relevant for an entity to consider : when making this judg e ment • Is the activity identified as a good or service to be provided in the that are not ? contractual arrangement with the customer Activities specifically identified could relate to an internal process of the entity , but they could also relate to implicit promises to the customer . • Does t he activity relate to the entity establishing processes and procedures can render the contracted goods or or training its employees, so that it - ? up activities) services to the customer (e.g., set Is the activity administrative in nature • establishing the customer’s (e.g., , invoicing the customer )? account • Is t of when the activity will be performe d ? he customer aware IFRS 15.26 provides examples of promised goods or services that may be included in a contract with a customer. Several of them were considered deliverables under legacy IFRS, including a good produced by an entity or a contractually agreed - upon task (o r service) performed for a customer. However, the IASB also included other examples that may not be en have considered deliverables in the past . For example, IFRS 15.26(e) describes a stand - ready obligation as a promised service that consists of standing re ady to provide goods or services or making goods or services available for a customer 91 IFRS 15.BC32, BC87. 92 IFRS 15.BC88. 93 . IFRS 15.BC89 A closer look at IFRS 15, the revenue recognition standard Updated October 2018 85

86 to use as and when it decides to use it. That is, a stand - ready obligation is has access to a good or service, rather than the promise that the customer a promise to tr ready ansfer the underlying good or service itself. Stand - obligations are common in the software industry (e.g., unspecified updates - and - if - available basis) and may be present in other to software on a when - 2 and 4 - 3 below for further discussion on stand - industries. See Questions 4 ready obligations. IFRS 15.26(g) notes that a promise to a customer may include granting rights to goods or services to be provided in the future that the customer can resell present promises to the or provide to its own customers. Such a right may re customer if it existed at the time that the parties agreed to the contract. As noted in the Basis for Conclusions, the Board thought it was important to clarify or service that a performance obligation may exist for a promise to provide a good in the future (e.g., when an entity makes a promise to provide goods or services 94 to its customer’s customer). These types of promises exist in distribution networks in various industries and are common in the automotive industry. After identifying the promised goods or services in the contract, an entity then determines which of these promised goods or services (or bundle of goods or services) represent separate performance obligations. The standard includes an entity would identify the promised the following example to ill ustrate how or services in a contract (including both explicit and implicit promises). goods The example also evaluates whether the identified promises are performance obligations, which we discuss in ection 4.2: s Extract from IFRS 15 Example 12 Explicit and implicit promises in a contract (IFRS 15.IE59 - — IE65A) An entity, a manufacturer, sells a product to a distributor (ie its customer) who will then resell it to an end customer. Case A — Explicit promise of servic e In the contract with the distributor, the entity promises to provide maintenance services for no additional consideration (ie ‘free’) to any party (ie the end customer) that purchases the product from the distributor. The entity outsources the performa nce of the maintenance services to the distributor and pays the distributor an agreed - upon amount for providing those services on the entity’s behalf. If the end customer does not use the maintenance services, the entity is not obliged to pay the distribu tor. – The contract with the customer includes two promised goods or services (a) the product and (b) the maintenance services. The promise of maintenance services is a promise to transfer goods or services in the future and is part of the negotiated exchange between the entity and the distributor. The entity assesses whether each good or service is distinct in accordance with paragraph 27 of IFRS 15. The entity determines that both the product and the maintenance services meet the criterion in paragra ph 27(a) of IFRS 15. The entity regularly sells the product on a stand - alone basis, which indicates that the customer can benefit from the product on its own. The customer can benefit from the maintenance services together with a resource the customer alre ady has obtained fr om the entity (ie the product). 94 IFRS 15.BC92. Updated October 2018 86 A closer look at IFRS 15, the revenue recognition standard

87 Extract from IFRS 15 (cont’d) The entity further determines that its promises to transfer the product and to provide the maintenance services are separately identifiable (in accordance with paragraph 27(b) of IFRS 15) on the basis of the principle and the factors in paragraph 29 of IFR S 15. The product and the maintenance services are not inputs to a combined item in the contract. The entity is not providing a significant integration service because the presence of the product and the services together in this contract do not result in any additional or combined functionality. In addition, neither the product nor the services modify or customise the other. Lastly, the product and the maintenance services are not highly interdependent or highly interrelated because the entity would be abl e to fulfil each of the promises in the contract independently of its efforts to fulfil the other (ie the entity would be able to transfer the product even if the customer declined maintenance services and would be able to provide maintenance services in relation to products sold previously through other distributors). The entity also observes, in applying the principle in 29 of IFRS 15, that the entity’s promise to provide maintenance paragraph is not necessary for the product to continue to provide sig nificant benefit to the customer. Consequently, the entity allocates a portion of the transaction price to each of the two performance obligations (ie the product and the maintenance services) in the contract. Case B — Implicit promise of service has historically provided maintenance services for no additional The entity consideration (ie ‘free’) to end customers that purchase the entity’s product from the distributor. The entity does not explicitly promise maintenance services during negotiations with the di stributor and the final contract between the entity and the distributor does not specify terms or conditions for those services. However, on the basis of its customary business practice, the entity determines at contract inception that it has made an impli cit promise to provide maintenance services as part of the negotiated exchange with the distributor. That is, the entity’s past practices of providing these services create valid expectations of the entity’s customers (ie the distributor and end customers ) in accordance with paragraph 24 of IFRS 15. Consequently, the entity assesses whether the promise of maintenance services is a performance obligation. For the same reasons as in Case A, the entity determines that the product and maintenance services are separate performance obligations. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 87

88 Extract from IFRS 15 (cont’d) Services are not a promised service — Case C In the contract with the distributor, the entity does not promise to provide any maintenance services. In addition, the entity typically does not provide maintenance services and, therefore, the entity’s customary business practices, published policies and specific statements at the time of entering into the contract have not created an implicit promise to provide goods or The entity transfers control of the product to the services to its customers. distributor and, therefore, the contract is completed. However, before the sale to the end customer, the entity makes an offer to provide maintenance services to any party that purchases the product from the distributor for no additional promised consideration. The promise of maintenance is not included in the contract between the entity and the distributor at contract inception. That is, in accordance with paragraph 24 of IFRS 15, the entity does not exp licitly or implicitly promise to provide maintenance services to the distributor or the end customers. Consequently, the entity does not identify the promise to provide maintenance services as a performance obligation. Instead, the obligation to provide m aintenance services is accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets . Although the maintenance services are not a promised service in the current contract, in future contracts with customers the entity wo uld assess whether it has created a business practice resulting in an implied promise to provide maintenance services. What’s chang ed from legacy IFRS? id IFRS d not specifically address contracts with multiple deliverables, Legacy identifying d focusing instead on identifying the transaction. This include 95 separate elements so as to reflect the substance of the transaction. As acy leg US GAAP for guidance in this a result, many IFRS preparers looked to area. Legacy US GAAP require d entities to identify the ’deliverables’ within an arrangement, but d id not define that term. In contrast, IFRS 15 indicates the types of items that may be goods or services promised in the c ontract. addition, the standard makes clear that certain activities are not promised In goods or services, such as activities that an entity must perform to satisfy its obligation to deliver the promised goods or services (e.g., internal administrative ac tivities). How we see it Some ‘free’ goods or services that may be treated as marketing incentives historically have to be evaluated under the standard to determine whether they represent promised goods or services in a contract. 95 IAS 18.13. Updated October 2018 88 A closer look at IFRS 15, the revenue recognition standard

89 FASB differences The FASB’s standard allows entities to elect to account for shipping and handling activities performed after the control of a good has been transferred to the customer as a fulfilment cost (i.e., an expense). Without GAAP entity that has shipping such an accounting policy choice, a US arrangements after the customer has obtained control may determine that the act of shipping is a performance obligation under the standard. If that were the case, the entity would be required to allocate a portion of ansaction price to the shipping service and recognise it when (or as) the tr the shipping occurs. in IFRS 15. In the Basis The IASB has not permitted a similar policy choice for Conclusions, the IASB noted that IFRS 15.22 requires an entity to assess or services promised in a contract with a customer in order to the goods identify performance obligations. Such a policy choice would override that requirement. Furthermore, a policy choice is applicable to all entities and it is possible that entities with signifi cant shipping operations may make different policy choices. Therefore, it could also reduce comparability 96 Since the between entities, including those within the same industry. it is FASB’s standard includes a policy choice that IFRS 15 does not, possible that diversity between IFRS and US GAAP entities may arise in practice . Another difference is that FASB uses different language in relation to implied contractual terms and whether those implied terms represent a promised good or service to a customer. IFR S 15 states that promised goods or services are not limited to explicit promises in a contract, but could be created by a ‘valid expectation of the customer’. ASC 606 refers to a ‘reasonable expectation of the customer’. The FASB used this language in or der to avoid confusion with the term ‘valid expectation’ because ASC 606 states that promises to provide goods or services do not need to be legally enforceable (although the overall arrangement needs to be enforceable). The use of the term ‘valid’ in IFRS 15 is consistent with the requirements for constructive obligations in IAS Provisions, Contingent Liabilities 37 and Contingent Assets While the terms used in IFRS 15 and ASC 606 are . different, we do not expect this to result in a difference in practice. 4.1.1 Identifying promised goods or services that are not identified as deliverables under legacy revenue requirements (updated October 2018) Following the issuance of IFRS 15, stakeholders questioned whether they have have not to identify promised goods or services under the standard that they identif ied as deliverables in the past . The question had been raised, in part, because the Boar d said in the Basis for Conclusions that it intentionally “decided not to exempt an entity from accounting for performance obligations that the entity might regard as being perfunctory or inconsequential. Instead, an entity should assess whether those perf ormance obligations are immaterial to its 97 financial statements”. In January 2015, the TRG members discussed this issue and generally agreed that the standard is not intended to require the identification of promised goods or services that were not account ed for as deliverables in the past . At the same time, entities may not disregard items that they deem to be perfunctory or or services represent inconsequential and need to consider whether ‘free’ goods promises to a customer. For example, telecommunicati ons entities may have to 96 IFRS 15.BC116U. 97 IFRS 15.BC90. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 89

90 allocate consideration to the ‘free’ handsets that they provide. Likewise, automobile manufacturers may have to allocate consideration to ‘free’ practice be en considered a marketing incentive in maintenance that may have under legacy IFRS . However, entities would consider materiality in determining whether items are promised goods or services. The Board subsequently considered the TRG members’ discussion and agreed that it does not expect entities to identify significantl y more performance obligations than the deliverables that were identified under legacy IFRS. FASB differences The FASB’s standard allows entities to disregard promises that are deemed to be immaterial in the context of a contract. That is, ASC 606 permits entities to disregard items that are immaterial at the contract level and does not require that the items be aggregated and assessed for materiality at the entity level. However, ASC 606 also emphasises that entities still need to evaluate whether custo mer options for additional goods or services are materials rights to be accounted for in accordance with the related requirements (see s ection 4.6 below). IFRS 15 does not include explicit language to indicate an entity can disregard serv or ices that are immaterial in the context of the promised goods contract. However, in the Basis for Conclusions, the IASB noted that it did not intend for entities to identify every possible promised good or services in a contract and that entities should consider materia lity and the overall objective of IFRS 15 when assessing promised goods or services and 98 identifying performance obligations. The IASB also noted that revenue standards under legacy IFRS d id not contain similar language to the guidance that was issued by the staff of the US SEC on inconsequential or perfunctory performance obligations 99 legacy The TRG’s discussion highlighted that the under US GAAP. concerns raised about identifying performance obligations that are not identified as deliverables under legacy requirements primarily relate to e potential changes in practice under US GAAP when comparing th legacy 100 US SEC guidance to ASC 606. 98 IFRS 15.BC116D. 99 IFRS 15.BC116E. 100 IFRS 15.BC116C. Updated October 2018 90 A closer look at IFRS 15, the revenue recognition standard

91 Frequently asked questions - 1: How should an entity assess whether pre production Question 4 - promised good or service? [TRG meeting 9 November 2015 activities are a – Agenda paper no. 46] Manufacturing and production entities in various industries had asked the how they should account for activities and costs incurred prior to the TRG ong production of goods under a l term supply arrangement when they adopt - . The questions arose because some long - IFRS 15 s term supply arrangement require an entity to incur up front engineering and design costs to create new technology or adapt existing technology to the needs of the cu stomer. These pre - production activities are often a prerequisite to delivering any units under a production contract. For example, a manufacturer may incur costs to perform certain services related to the design and development of products nder long - term supply arrangements it will sell u may also incur costs to . It design and develop mo u lds , dies and other tools that will be used to produce those products. A contract may the customer to reimburse the require manufacturer for these costs . Alternatively, re imbursement may be implicitly guaranteed as part of the price of the product or by other means. TRG members generally agreed that the determination of whether pre - production activities are a promised good or service or fulfilment activities s require judgem ent and consideration of the facts and circumstances. When making this evaluation, e determine whether the activity ntities need to transfers a good or service to a customer. If an entity determines that these are promised goods or services, it a pplies the requirements activities in IFRS 15 to those goods or services. TRG members generally agreed that if an entity is having difficulty - production activity is a promised good or service determining whether a pre in a contract, the entity should consider whether control of that good or service transfers to the customer. For example, if an entity is performing engineering and development services as part of developing a new product for a customer and the customer will own the resulting intellectual property ring control (e.g., patents), the entity would likely conclude that it is transfer engineering and development of the intellectual property and that the activities are a promised good or service in the contract. TRG members noted that assessing whether control transfers in such arrangements may be challenging. In some arrang ements, legal title of the good or service created from the pre - production activity is transferred to the customer. However, TRG members generally agreed that an entity has to consider all indicators of control transfer under IFRS 15 and that the transfer of legal title is not a presumptive indicator. I f a pre - production activity is determined to be a promised good or service, an entity allocate s a portion of the transaction price to that good or service (as a single performance obligation or as part of a combined performance obligation that includes the pre - production activities along with other goods or services). If the pre - production activities are included in a performance obligation satisfied over time, they are considered when measuring progress 7.1.4). ard satisfaction of that performance obligation (see ection s tow A closer look at IFRS 15, the revenue recognition standard Updated October 2018 91

92 Frequently asked questions (cont’d) production activity does not result in the transfer of control of - If a pre a good or service to a customer, an entity should consider other requirements that may be applicable (e.g., IAS 16, IAS 38, IFRS 15.95 - 98 on costs to fulfil a contract with a customer). - 2: What is the nature of the promise in a ‘typical’ stand - ready Question 4 – Agenda paper no. 16] obligation? [TRG meeting 26 January 2015 At the January 2015 TRG meeting, members of the TRG discussed numerous examples of stand ready obligations and generally agreed that - - ready obligation is the promise that the nature of the promise in a stand e, not the delivery of the customer will have access to a good or servic the underlying good or service. The standard describes a stand - ready obligation as a promised service that consists of standing ready to provide goods or services or making goods or services available for a customer to when it decides to do so. Stand ready obligations are common use as and - in the software industry (e.g., unspecified updates to software on a when - and if - available basis) and may be present in other industries. - The TRG agenda paper included the following types of prom ises to a customer that could be considered stand ready obligations, depending - on the facts and circumstances: • Obligations for which the delivery of the good, service or intellectual property is within the control of the entity, but is still being develop ed (e.g., a software entity ’s promise to transfer unspecified software upgrades at its discretion) Obligations for which the delivery of the underlying good or service • is outside the control of the entity and the customer (e.g., an entity’s ove snow from an airport runway in exchange for a fixed promise to rem fee for the year) • Obligations for which the delivery of the underlying good or service is within the control of the customer (e.g., an entity’s promise to provide - and - if needed basis on a customer’s periodic maintenance on a when - equipment after a pre established amount of usage by the customer) Obligations to make a good or service available to a customer • continuously (e.g., a gym membership that provides unlimited access to a customer for a specifie d period of time) An entity need s to carefully evaluate the facts and circumstances of its contracts to appropriately identify whether the nature of a promise to a customer is the delivery of the underlying good(s) or service(s) or the service of standin g ready to provide goods or services. Entities also have to consider other promises in a contract that includes a stand - ready obligation to appropriately identify the performance obligations in the contract. TRG members generally agreed that all contracts with a stand - ready element do not necessarily include a single performance obligation (refer to 101 4 - 3 below). Question 101 dated Customer options for additional goods and services, TRG Agenda paper no. 48, 9 . November 2015 Updated October 2018 92 A closer look at IFRS 15, the revenue recognition standard

93 Frequently asked questions (cont’d) At the TRG meeting, a FASB staff member also indicated that the staff does FASB intended to change practice under US GAAP for not believe that the determining when software or technology transactions include specified a separate performance obligation) or unspecified upgrade rights (i.e., a stand - ready obligation). For the TRG m embers’ upgrade rights (i.e., - ready discussion on measuring progress toward satisfaction for a stand - in s ection 11 7.1.4. C. obligation that is satisfied over time, see Question 7 3: Do all contracts with a stand - ready element include a single - Question 4 performance obligation t hat is satisfied over time? [TRG meeting 9 – Agenda paper no. 48] November 2015 TRG members generally agreed that the stand - ready element in a contract does not always represent a single performance obligation satisfied over time. This conclusion is consis tent with the discussion in Question 4 - 2 that, when identifying the nature of a promise to a customer, an entity may - ready element exists, but it is not the promised good determine that a stand or service for revenue recognition purposes. Instead, the unde rlying goods or services are the goods or services promised to the customer and accounted for by the entity. Consider the following example in the TRG agenda paper: A n entity is . required to stand ready to produce a part for a customer under a n MSA The tomer is not obligated to purchase any parts (i.e., there is no minimum cus guaranteed volume). However, it is highly likely the customer will purchase parts because the part is required to manufacture the customer’s product stomer to buy parts from multiple suppliers. and it is not practical for the cu TRG members generally agreed that the nature of the promise in this example is the delivery of the parts, rather than a service of standing ready. When the ly arrangement, it customer submits a purchase order under the master supp is contracting for a specific number of distinct goods and the purchase order creates new performance obligations for the entity. However, if the entity determined that the nature of the promise is a service of standing ready, the contract would be accounted for as a single performance obligation satisfied over time. In that situation, the entity may be required to estimate the number of purchases to be made throughout the contract term (i.e., make an estimate of variable consid eration and apply the constraint and continually update the transaction price and on variable consideration) its allocation among the transferred goods or services. The TRG agenda paper also noted that, in this example, the entity is not obligated to tr ansfer any parts until the customer submits a purchase order (i.e., the customer makes a separate purchasing decision). This contrasts with a stand - ready obligation, which requires the entity to make a promised service available to the customer and does n ot require the customer to make any additional purchasing decisions. See Question 4 1 2 in section 4.6 - for further discussion on determining whether a contract involving variable quantities of goods or services should be accounted for as variable considerat ion (i.e., if the nature of the promise is - ready to transfer one overall service to the customer, such as a stand obligation) or a contract containing customer options (i.e., if the nature of the promise is to transfer the underlying distinct goods or serv ices). A closer look at IFRS 15, the revenue recognition standard Updated October 2018 93

94 4.2 Determining when promises are performance obligations 2018) October (updated or services within a contract, an entity After identifying the promised goods or services will be treated as separate determines which of those goods performance obligations. That is, the entity identifies the individual units of account. Promised goods or services represent separate performance obligations if the goods or services are distinct (by themselves, or a s part of a bundle of goods or services) (see section 4.2.1) or if the goods or services are part of a series of distinct goods services that are substantially the same or and have the same pattern of transfer to the customer (see s ection 4.2.2). If a promised good or service is not distinct, an entity is required to combine that good or service with other promised goods or services until it identifies a bundle of goods or services that, together, is distinct. An entity is required to account for all the goods or services promised in a contract as a single performance obligation if the entire bundle of promised goods or services is See 4.3 for further s ection the only performance obligation identified. discussion. The following flow : chart illustr ates these requirements Combine with other promised Is the promised good or service capable No goods or services until distinct of being dist inct (see section 4.2.1.A)? bundle exists (see section 4.3). Yes Is the promised good or service distinct in the context of the contract (see No section 4.2.1.B)? Yes Promised good or service is a performance obligation (i.e., separate unit of account) (see section 4.2.1). requirement Consider whether series applies (see section 4.2.2). Updated October 2018 94 A closer look at IFRS 15, the revenue recognition standard

95 A single performance obligation may include a licence of intellectual property and other promised goods or services. IFRS 15 identifies two examples of licences of intellectual property that are not distinct from other promised goods or services in licence that is a component of a tangible good a contract: (1) a ; and that is integral to the functionality of the tangible good and (2) a licence that the customer can benefit from only in conjunction with a related service (e.g., an online hosting servi ce that enables a customer to access the content 102 provided by the licence of intellectual property). s ection 8.1.2 for See further discussion on these two examples. The standard also specifies that the following items are performance obligations: • Customer options for additional goods or services that provide material rights to customers (see IFRS 15.B40 in s ection 4.6) • - type warranties (see IFRS 15.B28 - B33 in s ection 9.1) Service Entities do not apply the general model to determine whether these goods or services are performance obligations because the Board deemed them to be performance obligations if they are identified as promises in a contract. 4.2.1 Determination of ‘distinct’ IFRS 15 outlines a two step process for determining whether a promised good - or service (or a bundle of goods or services) is distinct: • Consideration at the level of the individual good or service of whether the customer can benefit from the good or service on its own or with other (i.e., readily available resources the good or service is capable of being distinct) separately identifiable • Consideration of whether the good or service is the from other promises in the contract (i.e., good promise to transfer the or service is distinct within the context of the contract) Both of these criteria must be met to conclude that the good or service is distinct. If these criteria are met, the individual good or service must be accounted for as a separate unit of account (i.e., a performance obligation). The Board concl uded that both steps are important in determining whether a promised good or service should be accounted for separately. The first criterion (i.e., capable of being distinct) establishes the minimum characteristics for a good or service to be accounted fo r separately. However, even if the individual goods or services promised in a contract may be capable of being distinct, it may not be appropriate to account for each of them separately because doing so would not result in a faithful depiction of the ent ity’s performance in that contract or 103 appropriately represent the nature of an entity’s promise to the customer. s to consider the interrelationship of those goods Therefore, an entity also need thin the context or services to apply the second criterion (i.e., distinct wi of the contract) and determine the performance obligations within a contract. I FRS IC received a request about the identification of performance obligations in a contract for the sale of a real estate unit that includes the transfer of l , and which i s discussed below in section 4.2.1.B. 102 IFRS 15.B54. 103 IFRS 15.BC102. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 95

96 4 .2.1.A Capable of being distinct The first criterion requires that a promised good or service must be capable of being distinct by providing a benefit to the customer either on its own or together with other resources that are readily available to the customer. The standard provides the following requirements on how to determine whether a promised good or service is capable of being distinct: Extract from IFRS 15 28. A customer can benefit from a good or service in accordance with paragraph 27(a) if the good or service could be used, consumed, sold for an amount that is greater than scrap value or otherwise held in a way that generates economic benefits. For some goods or services, a customer may be able to benefit from a good or service on its own. For other goods or services, a customer may be able to benefit from the good or service only in conjunction with other readily available resources. A readily available resource is a good or service that is sold separately (by the entity or another entity) or a resource that the customer has already obtained from the entity (including goods or services that the entity will have already transferred to the customer under the contract) or from other transactions or events. Various factors may provide evidence that the customer can benefit from a good or service either on its own or in conjunction with other readily available resources. For example, the fact that the entity regularly sells a good or service separately would indicate that a customer can benefit from the good or service on its own or with other re adily available resources. Determining whether a good or service is capable of being distinct is straightforward in many situations. For example, if an entity regularly sells a good or service separately, this fact would demonstrate that the good or serv ice provides benefit to a customer on its own or with other readily available resources. The evaluation may require more judgement in other situations, particularly when the good or service can only provide benefit to the customer with readily sources provided by other entities. These are resources that meet available re either of the following conditions: • They are sold separately by the entity (or another entity). • The customer has already obtained them from the entity (including goods or services that the entity has already transferred to the customer under the contract) or from other transactions or events. As noted in the Basis for Conclusions, the assessment of w hether the customer can benefit from the goods or services (either on its own or with other readily available resources) is based on the characteristics of the goods or services 104 themselves, instead of how the customer might use the goods or services. Consistent with this notion , an entity disregards any contractual limitations that may prevent the customer from obtaining readily available resources from a party other than the entity when making this assessment (as illustrated below , extracted in 11, Ca se D s ection in Example 4.2.3 ) . IFRS IC also reiterated this for further point during its March 2018 meeting (see section 4.2.1 .B discussion ). 104 IFRS 15.BC100. Updated October 2018 96 A closer look at IFRS 15, the revenue recognition standard

97 In the Basis for Conclusions, the Board explained that “the attributes of being previous revenue recognition requirements for distinct are comparable to the identifying separate deliverables in a multiple - element arrangements, which specified that a delivered item must have ‘value to the customer on a stand - ately.” However, the alone basis’ for an entity to account for that item separ Board did not use similar terminology in IFRS 15 so as to avoid implying that an entity must assess a customer’s intended use for a promised good or service when it is identifying performance obligations. It observed that it would be 105 difficult, if not impossible, for an entity to know a customer’s intent. 1.B Distinct within the context of the contract (updated October 2018) 4.2. Once an entity has determined whether a promised good or service is capable of individual characteristics of the promise, the entity being distinct based on the considers the second criterion of whether the good or service is separately identifiable from other promises in the contract (i.e., whether the promise to transfer the good or service is distinct within the context of the contract) . The standard provides the following requirements for making this determination: Extract from IFRS 15 29. In assessing whether an entity’s promises to transfer goods or services to 27(b), the customer are separately identifiable in accordance with paragraph the objective is to determine whether the nature of the promise, within the context of the contract , is to transfer each of those goods or services individually or, instead, to transfer a combined item or items to which the promised goods or services are inputs. Factors that indicate that two or more promises to transfer goods or services to a customer are not separately identifiable include, but are not limited to, the following: (a) t he entity provides a significant service of integrating the goods or services with other goods or services promised in the contract into a bundle of goods or services that represent the combined output or outputs for which the customer has contracted. In other words, the entity is using the goods or services as inputs to produce or deliver the combined output or outputs specified by the c ustomer. A combined output or outputs might include more than one phase, element or unit. (b) o ne or more of the goods or services significantly modifies or customises, or are significantly modified or customised by, one or more of the other goods or services promised in the contract. (c) t he goods or services are highly interdependent or highly interrelated. In other words, each of the goods or services is significantly affected by one or more of the other goods or services in the contract. For example, in some cases, two or more goods or services are significantly affected by each other because the entity would not be able to fulfil its promise by transferring each of the goods or services independently. 105 IFRS 15.BC101. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 97

98 : The following illustration depicts the above requirement s Is the good or service distinct in the context of the contract? Evaluate whether the good or service is separately identifiable from other p romises in the contract. Factors to consider include: s Are the goods or services or Does the entity provide Do one or more good a significant service of services significantly in the contract highly integrating goods or interdependent or highly modify or customise services with other other goods or services interrelated? goods or services in the in the contract? contract? Separately identifiable principle To determine whether promised goods or services are separately identifiable (i.e., whether a promise to transfer a good or service is distinct within the s xt of the contract), an entity need conte to evaluate whether its promise is to transfer each good or service individually or a combined item (or items) that comprises the individual goods or services promised in the contract. Therefore, an entity would evalua te whether the promised goods or services in the contract are outputs or they are inputs to a combined item (or items). In the Basis for Conclusions, the Board noted that, in many cases, a combined item (or rom) the sum of the underlying is items) more than (or substantially different f 106 or services. promised goods The evaluation of whether an entity’s promise is separately identifiable considers the relationship between the various goods or services in the context of the process to fulfil the contract. Therefore, an entity considers the level of integration, interrelation or interdependence among the promises to transfer goods or services. In the Basis for Conclusion, the Board observed that, rather ds on the other than considering whether one item, by its nature, depen whether two items have a functional relationship), an entity evaluates (i.e., whether there is a transformative relationship between the two or more items 107 in the process of fulfilling the contract. The was also reiterated by point ). the IF RS IC during its March 2018 meeting (see below discussion The Board also emphasised that the separately identifiable principle is applied within the context of the bundle of promised goods or services in the contract. It is not within the context of eac h individual promised good or service. That is, the separately identifiable principle is intended to identify when an entity’s performance in transferring a bundle of goods or services in a contract is fulfilling a single promise to a customer. Therefore, to apply the ‘separately identifiable’ principle, an entity evaluates whether two or more promised goods or services significantly affect each other in the contract (and are, therefore, 108 highly interdependent or highly interrelated). As an example of this evaluation, the IASB discussed in the Basis for Conclusions a typical construction contract that involves transferring to services that are capable of being distinct the customer many goods or services). In (e.g., various building materials, labour, project management or this example, the IASB concluded that identifying all of the individual goods services as separate performance obligations would be impractical and would 106 IFRS 15.BC116J. 107 IFRS 15.BC116K. 108 IFRS 15.BC116L. Updated October 2018 98 A closer look at IFRS 15, the revenue recognition standard

99 not faithfully represent the nature of the entity’s promise to the customer. That i s, the entity would recognise revenue when the materials and other inputs to the construction process are provided rather than when it performs (and uses those inputs) in the construction of the item the customer has contracted ing, a house). As such, when determining whether a to receive (e.g., a build promised good or service is distinct, an entity not only determine s whether the good or service is capable of being distinct but also whether the promise 109 to transfer the good or service is distinct withi n the context of the contract. IFRS 15.29 includes three factors (discussed individually below) that are intended to help entities identify when the promises in a bundle of promised goods or services are not separately identifiable and, therefore, should be combined into a single performance obligation. In the Basis for Conclusions, the IASB noted that these three factors are not an exhaustive list and that not all of the factors need to exist in order to conclude that the entity’s promises to transfer goods or services are not separately identifiable. As emphasised by the IFRS IC during its March 2018 meeting (see discussion below ) , t he three factors also are not intended to be criteria that are evaluated independently of the separately identifiable pri nciple. Given the wide variety of arrangements are that are within the scope of IFRS 15, the Board expects that there some are less relevant to the evaluation of the instances in which the factors 110 Entities may need to ap ply significant separately identifiable principle. judgement to evaluate whether a promised good or service is separately identifiable. The evaluation require s a thorough understanding of the facts and circumstances present in each contract. the following An entity should consider 111 , which summarise what is discussed in the Basis for Conclusion s : questions the • Is the combined item greater than , or substantively different from , sum or of the promised goods services? Is an entity, in substance, fulfilling a single promise to the customer? • Is the risk an entity assumes to fulfil its obligation to transfer a promised • good or service inseparable from the risk relating to the transfer of the other promised goods or services in the bundle? Do two or more promised goods or services each significantl y affect the • other? • Does each promised good or service significantly affect the other promised good or service’s utility to the customer? Significant integration service The first factor (included in IFRS 15.29(a)) is the presence of a significant ion service. The IASB determined that, when an entity provides integrat a significant service of integrating a good or service with other goods or services in a contract, the bundle of integrated goods or services represents a combined output or outputs. In other words, when an entity provides a significant integration service, the risk of transferring individual goods or services is inseparable from the bundle of integrated goods or services because a substantial part of an entity’s promise to the customer is t o make sure the individual goods or services are incorporated into the combined output 112 When evaluating this factor, entities need to consider whether or outputs. they are providing a significant integration service that effectively transforms the individ ual promised goods or services (the inputs) into a combined output(s) , as discussed in Example 11, Case E (included in section 4.2.3 below). 109 IFRS 15.BC102. 110 IFRS 15.BC116N. 111 - IFRS 15.BC116J BC116L. 112 IFRS 15.BC107. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 99

100 This is consistent with the notion discussed above that a combined item (or items) would be greater than (or substa ntially different from) the sum of or the underlying promised goods services. This factor applies even if there is more than one output. Furthermore, as described in the standard, a combined output or outputs may include more than one phase, element or u nit. In the Basis for Conclusions, the IASB noted that this factor may be relevant in many construction contracts in which a contractor provides an integration (or contract management) service to manage and coordinate the various construction tasks and to assume the risks associated with the integration of those tasks. An integration service provided by the contractor often includes coordinating the activities pe rformed by any subcontractors and making sure the quality of the work performed is in compliance with contract specifications and that the individual goods or services are appropriately integrated into 113 receive. the combined item that the customer has contracted to This type of construction contract and the f whether o it contains a significant analysis integration service is illustrated in Example 10, Case A (included in section 4.2.3 below). The Board also observed that this factor could apply 114 to other industries as well. Significant modification or customisation The second factor in IFRS 15.29(b) is the presence of significant modification or customisation. In the Basis for Conclusions, the IASB explained that in some industries, the notion of insepa rable risks is more clearly illustrated by assessing whether one good or service significantly modifies or customises another. This is because if a good or service modifies or customises another good or service assembled together (as an input) to in a contract, each good or service is being 115 produce a combined output. In the Basis for Conclusions IFRS 15, the Board provided the following on exampl : a ssume that an entity promises to provide a customer with software e that it will significantly customise to make the software function with the customer’s existing infrastructure. Based on its facts and circumstances, the entity determines that it is providing the customer with a fully integrated antly modify system and that the customisation service requires it to signific the software in such a way that the risks of providing it and the customisation service are inseparable (i.e., the software and customisation service are not 116 separately identifiable). The of modification or customisation services can affect an entity’s significance conclusion about the number of identified performance obligations for similar fact patterns. Consider Example 11, Case A, and Example 11, Case B, in the standard (included in section 4.2.3 b elow). In Case A, each of the promised goods or services are determined to be distinct because the installation services being provided to the customer do not significantly modify the software. B, two of the promised goods or In Case services are combined into one performance obligation because one promise (the installation) significantly customises another promise (the software). 113 IFRS 15.BC107. 114 IFRS 15.BC108. 115 IFRS 15.BC109. 116 IFRS 15.BC110. Updated October 2018 100 A closer look at IFRS 15, the revenue recognition standard

101 Highly interdependent or highly interrelated The third factor in IFRS 15.29(c) is whether the promised goods or services are highly interdependent or highly interrelated. This is often the most difficult distinct factor for entities to assess and it is expected to be an area of focus Promised goods or services are highly for entities and their stakeholders. interdependent or hi ghly interrelated if each of the promised goods or services is significantly affected by one or more of the other goods or services in the contract. As discussed above, the Board clarified that an entity would evaluate how two or more promised goods or ser vices affect each other and not just evaluate whether one item, by its nature, depends on the other. That is, an entity needs to evaluate whether there is a two - way dependency or transformative relationship between the promised goods or services to ine whether the promises are highly interdependent or highly determ interrelated. In the Basis for Conclusions on IFRS 15, the Board provided the following example. An entity promises to design an experimental new product for a customer and to manufacture ten pr ototype units of that product. Because the product and manufacturing process is unproven, the entity is required to continue to revise the design of the product during the construction and tes t - progress or of the prototypes and make any necessary modifications to in completed prototypes. The entity expects that most or all , of the units to be , produced will require some rework because of design changes made during the production process. That is, the customer likely to be able to choose is not whether to purchase only the design service or the manufacturing service without one significantly affecting the other. The entity determines that the design and manufacturing promises are highly inter dependent on, and highly the contract. Consequently, although interrelated with, the other promises in each promise may provide a benefit on its own, the promises are not separately 117 identifiable within the context of the contract. Conversely, if the design was similar to that of a previous product and/or the entity did not expect to have to rework the prototypes due to design changes, inter the entity might determine that the two promises are not highly dependent ight or highly interrelated and m conclude the contract contains multiple performance obligations. Goods or se rvices may not be separately identifiable if they are so highly inter dependent , on or highly interrelated with , other goods or services under the contract This may occur when the customer ’s decision . not to purchase one promised good or service would signi ficantly affect the other promised goods or services. In other words, the promised goods or services are so highly interrelated or highly interdependent with each other that the entity could romises in the not fulfil an individual promise independently from the other p This concept regarding an entity contract. a promise ’s ability to separately fulfil to a customer is highlighted in Example 11, Case E, (included in section 4.2.3 below) in the standard. Example 11, Case E, includes a contract for the sale o f equipment and specialised consumables to be used with the equipment. In this example, the entity determines that the equipment and consumables are not highly interdependent or highly interrelated because the two promises do not significantly affect each other. As part of its analysis, the entity concludes that it would be able to fulfil each of its promises in the contract independently of the other promises. 117 IFRS 15.BC112. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 101

102 March 2018 IFRS IC discussion request regarding the identification of In 2017, the IFRS IC received a performance obligations in a contract for the sale of a real estate unit that includes the transfer of land. The request also asked about the timing of revenue recognition for each performance obligation (either over time or at a poi nt in - time), which is discussed in Question 7 in section 7. 1.3 . At its March 2018 - 10 meeting, the IFRS IC concluded that the principles and requirements in IFRS 15 provide sufficient guidance for an entity to recognise revenue in a contract for f a real estate unit that includes the transfer of land. Consequently, the sale o 118 IC decided not to add this matter to its agenda. the IFRS the IFRS IC noted that the assessment of the distinct In considering this request, criteria requires judgement. Furthermore: • The assessment of the first criterion is “based on the characteristics of the goods or services themselves. Accordingly, an entity disregards any contractual limitations that might preclude the customer from obtaining urce other than the entity” (see readily available resources from a so 119 4.2.1.A). section • The objective underlying the second criterion is to determine the nature of the promise within the context of the contract. That is, whether the entity has promised to transfer either the promised goods or services individually or a combined item to which those goods or services are inputs. IFRS 15 also includes some factors that indicate that two or more promises to 120 transfer goods or services are no t separately identifiable. However, these factors are not intended to be criteria that an entity evaluates independently of the ‘separately identifiable’ principle because, in some instances, one or more of the factors may be less relevant to the evaluation 121 of that principle (see section 4.2.1.B). In the Bas is for Conclusion, the Board indicated that the separately identifiable concept is influenced by the idea of separable risks. That is, whether the risk assumed to fulfil the obligation to transfer one of the promised goods or services to the customer is se parable from the risk relating to the transfer of the other promised goods or services). Evaluating whether an entity’s promise is separately identifiable considers the interrelationship between the goods or services within the contract in the he process to fulfil the contract. Accordingly, an entity considers context of t the level of integration, interrelation or interdependence among the promises in the contract to transfer goods or services. An entity evaluates whether, in the process of fulfilling the contract, there is a transformative relationship between the promises, rather than considering whether one item, by its nature, depends another (i.e., whether the promises have a functional 122 relationship). the identification of pe rformance obligation s The IFRS IC discussed in its March 123 2018 meeting using the following example from the IFRS IC agenda paper: 118 IFRIC Update IASB’s website . , March 2018, available on the 119 IFRS 15.BC100; IFRIC Update , March 2018, available on the IASB’s website . 120 IFRIC Update , March 2018, available on the IASB’s website . IFRS 15.29; 121 IFRIC Update , March 2018, avail able on the IASB’s website . IFRS 15.BC116N; 122 IFRS 15.BC105, 116J and 116K . 123 IFR S IC Agenda paper 2D, March 2018, Revenue recognition in a real estate contract that , transfer of land (IFRS 15) , available on the IASB’s website ; IFRIC Update includes the IASB’s website 8, available on the 201 March . Updated October 2018 102 A closer look at IFRS 15, the revenue recognition standard

103 Illustration 4 1 — Identification of performance obligations in a contract - for the sale of a real estate unit that includes the transfer of land Entity A enters into a non - cancellable contract with a customer for the sale of a real estate unit that involves the transfer of a plot of land and a buildi ng that Entity A constructs on that land. The land represents all of the area on which the building will be constructed and the contract is for the entire building. At contract inception, Entity A transfers the legal title of the land and the customer pays the price specified in the contract for it. The transfer of legal title to the customer cannot be revoked, regardless of what happens during the construction of the building. Throughout the construction period, the customer makes milestone payments that do not necessarily correspond to the amount of work completed to date. The design and specification of the building were agreed between the counterparties before the contract was signed. However, during the construction of the building, the customer can request changes to the design and specification that are priced by Entity A based on a methodology sp ecified in the contract. If the customer decides to proceed with the proposed changes, Entity A can reject them only for a limited number of reasons (e.g., when the change would breach planning permission). Entity A would lead to an unreasonable can only request changes if not doing so increase in costs or delay construction. However, the customer must approve those changes. Entity A first assesses whether the land and the building are each capable of being distinct in accordance with IFRS 15.27(a) . Entity A determines that the customer could benefit from the land on its own or together with other resources readily available to it e.g., by hiring another developer to construct a building on the lan d. Also, Entity A determines that the customer could benefit from the construction of the building on its own or together with other resources readily available to it. For example, by obtaining the construction services from Entity A or another developer w ithout transferring the land. Therefore, Entity A concludes that the land and the building are each capable of being distinct. The criterion in paragraph 27(b) is then assessed by Entity A in order to determine whether the land and the buildaing are disti nct in the context of the contract. In making this assessment, Entity A considers the factors in IFRS 15.29, including the following: a. Whether it provides a significant service of integrating the land and the ses the transformative building into a combined output. Entity A analy relationship between the transfer of the land and the construction of the building in the process of fulfilling the contract. In making this analysis it considers whether its performance in constructing the building would be differen t if it did not also transfer the land and vice versa. Despite the functional relationship between the land and the building (because the building cannot exist without the land on which its foundations will be ferring the land may, or built), the risks assumed by Entity A in trans may not, be separable from those assumed in constructing the building. Whether the land and the building are highly interdependent or highly b. interrelated. Entity A determines whether its promise to transfer the land could be fulf illed if it did not also construct the building and vice versa. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 103

104 Illustration 4 - — Identification of performance obligations in a contract 1 (cont’d) for the sale of a real estate unit that includes the transfer of land promises would be separately identifiable The IFRS IC concluded that the two if Entity A concluded that “(a) its performance in constructing the building would be the same regardless of whether it also transferred the land; and (b) it would be able to fulfil its promise to construct the bui lding even if it did not also transfer the land, and would be able to fulfil its promise to transfer 124 the land even if it did not also construct the building.” Examples The IASB included a number of examples in the standard that illustrate n of the requirements for identifying performance obligations. the applicatio The examples include analysis of how an entity may determine whether the promises to transfer goods or services are distinct within the context of the s ection 4.2.3 below for full extracts of several of these contract. Refer to examples. How we see it IAS 18 indicate d that an entity may need to apply its recognition criteria to separately identifiable elements in order to reflect the substance of the transaction. However, it d id not provide additional application guidance for determining those separate elements. As such, the requirements in IFRS 15 may change practice. Many IFRS preparers developed their legacy IFRS accounting policies by reference to US GAAP. Whether IFR S 15 legacy results in a change in practice may depend on which US GAAP requirements they ha d considered when developing their policies. - The first step of the two step process to determine whether goods or services are distinct is similar to the principles for d etermining separate units legacy US GAAP requirements in ASC 605 - 25 Revenue of accounting under — Multiple - Element Arrangements . However, the second step Recognition of considering the goods or services within the context of the contract is ment that entities have found especially challenging to apply . a new require Therefore, entities need to carefully evaluate this second step to determine whether their historical units of account for revenue recognition may need entity to use significant to change. This evaluation may require an judgement. Entities that ha d previously looked to other legacy US GAAP requirements to develop their accounting policies, such as ASC 985 - Software — 605, , may also reach different conclusions under IFRS Revenue Recognition 15. It is important to note that the assessment of whether a good or service is distinct must consider the specific contract with a customer. That is, an entity cannot assume that a particular good or service is distinct (or not distinct) in all instances. The m anner in which promised goods or services are bundled within a contract can affect the conclusion of whether a good or or service is distinct. We anticipate that entities may treat the same goods services differently, depending on how those goods or servic es are bundled within a contract. 124 IFRIC Update . ASB’s website I , March 2018, available on the Updated October 2018 104 A closer look at IFRS 15, the revenue recognition standard

105 4.2.2 Series of distinct goods services that are substantially the same and or have the same pattern of transfer (updated October 2018) As discussed above, IFRS 15.22(b) defines, as a second type of performance obligation, a promise to transfer to the customer a series of distinct goods or services that are substantially the same and that have the same pattern if both of the following criteria from IFRS 15.23 are met of transfer, : • Each distinct good or service in the series that the entity promises to transfer represents a performance obligation that would be satisfied over time, in accordance with IFRS 15.35 (see below and s ection 7.1), if it were accounted for separately. • The entity would measure its progress toward satisfaction of the performance obligation using the same measure of progress for each ection 7.1.4). service in the series (see distinct good or s Distinct and Satisfied over One performance Same measure of substantially the time obligation progress same If a series of distinct goods or services meets the criteria in IFRS 15.22(b) and the series requirement), an entity is required to treat that IFRS 15.23 ( i.e., it is not optional). series as a single performance obligation (i.e., The Board incorporated this requirement to simplify the model and promote consistent identification of performance obligations in cases when an entity provides the 125 Without the series requirement, vice over a period of time. same good or ser the Board noted that applying the revenue model might present operational challenges because an entity would have to identify multiple distinct goods to each distinct good or service on or services, allocate the transaction price a stand - alone selling price basis and then recognise revenue when those performance obligations are satisfied. The IASB determined that this would not e obligation a single performanc ies be cost effective. Instead, an entity identif and allocate the transaction price to that performance obligation. It will then recognise revenue by applying a single measure of progress to that 126 performance obligation. one of For distinct goods or services to be accounted for as a series, the criteria This is often the most difficult they must be substantially the same. is that In the Basis for Conclusions, the Board provided . criterion for entities to assess cleaning, transaction processing and three examples of repetitive services (i.e., 127 delivering electricity) that meet the series requirement. In addition, TRG members generally agreed that when determining whether distinct goods or services are substantially the same, entities need to first determine the nature because a series could consist of either specified of their promise. This is each unit of a good) quantities of the underlying good or service delivered (e.g., an hourly service), depending on the nature or distinct time increments (e.g., the promise is to deliver a specified of the promise. That is, if the nature of monthly payroll services over a defined contract quantity of service (e.g., period), the evaluation considers whether each service is distinct and ise is to substantially the same. In contrast, if the nature of the entity’s prom 125 IFRS 15.BC113. 126 IFRS 15.BC114. 127 IFRS 15.BC114. 105 A closer look at IFRS 15, the revenue recognition standard Updated October 2018

106 stand ready or provide a single service for a period of time (i.e., because there is an unspecified quantity to be delivered), the evaluation considers whether hour, day), rather than the underlying activities, is each time increment (e.g., 128 nct and substantially the same. disti chart illustrates how the determination of the nature of the The following flow ect whether the series requirement applies : promise might aff Determine the nature of the promise Delivery of an unspecified quantity of Delivery of a specified quantity of a a service (e.g., stand - ready service (e.g., monthly payroll good or obligation to provide an processing for one year) that is outsourcing service for one year) IT satisfied over time satisfied over time that is each good or service distinct Is Is each time increment distinct substantially the same? and substantially the same? and No Yes Yes No Not a series Not a series Series Series It is important to highlight that even if the underlying activities an entity performs to satisfy a promise vary significantly throughout the day and from day to day, that fact, by itself, does not mean the distinct goods or services the same. Consider an example where the nature of are not substantially the promise is to provide a daily hotel management service. The service is cleaning services, comprised of activities that may vary each day (e.g., or reservation services property maintenance). However, the entity determines that the daily hotel management services are substantially the same because the nature of the entity’s promise is the same each day and the entity is 6 - providing the same overall management service each day. See Question 4 r discussion on determining the nature of an entity’s promise and for furthe evaluating the substantially the same criterion. A TRG agenda paper explained that, when considering the nature of July 2015 the entity’s promise and the applicability of the series requirem ent (including whether a good or service is distinct), it may be helpful to consider which over - why the entity concluded that time criterion in IFRS 15.35 was met (i.e., 129 As discussed further the performance obligation is satisfied over time). ection 7.1, a performance obligation is satisfied over time if one of three in s criteria are met. For example, if a performance obligation is satisfied over time because the customer simultaneously receives and consumes the benefits i.e., the first over - time criterion in provided as the entity performs ( IFRS 15.35(a)), that may indicate that each increment of service is capable of being distinct. If that is the case, the entity would need to evaluate whether ubstantially the same). each increment of service is separately identifiable (and s If a performance obligation is satisfied over time based on the other two criteria in IFRS 15.35 (i.e., (1) the entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or (2) the entity’s performance does not create an asset with an alternative use to the 128 TRG Agenda paper no. 39, Application of the Series Provision and Allocation of Variable Consideration July 2015. , dated 13 129 on and Allocation of Variable TRG Agenda paper no. 39, Application of the Series Provisi , dated 13 July 2015. Consideration Updated October 2018 106 A closer look at IFRS 15, the revenue recognition standard

107 entity and the entity has an enforceable right to payment for performance completed to date), the nature of that promise might be to deliver a single e (e.g., specified good or servic a contract to construct a single piece of equipment), which would not be considered a series because the individual goods or services within that performance obligation are not distinct. n is a single An entity’s determination of whether a performance obligatio performance obligation comprising a series of distinct goods or services or a single performance obligation comprising goods or services that are not distinct s the accounting in the following areas: (1) from one another affect allocation of section 6); (2) contract modifications (see variable consideration (see ection s 3.4); and (3) changes in transaction price (see s ection 6.5). As the IASB discussed in the Basis for Conclusions and members of the TRG discussed at their March 2015 meeting, an entity considers the underlying distinct goods or services in the contract, rather than the single performance obligation identified under the series requirement, when applying the requirements for these three 130 areas of the model. included in a The following example, TRG agenda paper, illustrates March 2015 how the allocation of variable consideration may differ for a single performance obligation identified under the series requirement and a single performance obligation comprising non - distinct goods an d/or services. Consider a five - year service contract that includes payment terms of a fixed annual fee plus a performance bonus upon completion of a milestone at the end of year two. If the entire service period is determined to be a single performance obl igation comprising a series of distinct services, the entity may be able to conclude that the variable consideration (i.e., the bonus amount) should be allocated directly to its efforts to perform the distinct services up to the date that the milestone is achieved (e.g., the underlying distinct services in years one and two). This could result in the entity recognising the entire bonus amount at the end of year two (when it is highly . probable that a significant revenue reversal will not occur) 4 6 for several examples of services for which it would be See Question - 131 e l reasonab to conclude that they meet the series requirement. In contrast, if the entity determines that the entire service period is a single - performance obligation that is comprised of non tinct services, the bonus dis would be included in the transaction price (subject to the constraint on variable ection 5.2.3) and recognised based on the measure of see consideration — s progress determined for the entire service period. For example, assume the bonus becomes part of the transaction price at the end of year two (when it is highly probable that a significant revenue reversal will not occur ). In that case, a portion of the bonus would be recognised at that the end of year two ba completed to date and a portion would be recognised as sed on performance the remainder of the performance obligation is satisfied. As a result, the bonus amount would be recognised as revenue through to the end of the five - year service period. 130 , dated IFRS 15.BC115 and TRG Agenda paper no. 27, Series of Distinct Goods or Services 30 March 2015, respectively . 131 Series of Distinct Goods or Services TRG Agenda paper no. 27, 30 March 2015. , dated A closer look at IFRS 15, the revenue recognition standard Updated October 2018 107

108 How we see it rement is a new concept. We believe that entities may need The series requi to apply significant judgement when determining whether a promised good or service in a contract with a customer meets the criteria to be accounted for as a series of distinct goods or services. As - 6 illustrated in Question 4 below, promised goods or services that meet the series criteria are not limited to a particular industry and can encompass a wide array of promised or services. goods Entities should consider whether they need to add or make ch anges to their business processes or internal controls as a result of this new requirement. Frequently asked questions Question 4 - 4: In order to apply the series requirement, must the goods or services be consecutively transferred? [TRG meeting 30 March 2015 – Agenda paper no. 27] TRG members generally agreed that a series of distinct goods or services need not be consecutively transferred. That is, the series requirement must be applied even when there is a gap or an overlap in an entity’s transfer of go ods or services, provided that the other criteria are met. TRG members also noted that entities may need to carefully consider whether the series requirement applies, depending on the length of the gap between an entity’s transfer of goods or services. Sta keholders had asked this question because the Basis for Conclusions 132 uses the term ‘consecutively’ when it discusses the series requirement. However, the TRG agenda paper concluded that the Board’s discussion was ment only applies to circumstances not meant to imply that the series require in which the entity provides the same good or service consecutively over a period of time. The TRG agenda paper included an example of a contract under which an entity provides a manufacturing service producing 24,000 un its of a product - year period. The conclusion in the TRG agenda paper was that the over a two criteria for the series requirement in IFRS 15.23 were met because the units produced under the service arrangement were substantially the same and were distinct s ervices that would be satisfied over time (see s ection 7.1). This is because the units are manufactured to meet the customer’s specifications the entity’s performance does not create an asset with alternative use (i.e., to the entity). Furthermore, if the contract were to be cancelled, the entity would have an enforceable right to payment (cost plus a reasonable profit margin). The conclusion in the TRG agenda paper was not influenced by whether the entity would perform the service evenly over the two - yea r period (e.g., produce 1,000 units per month). That is, the entity could produce 2,000 units in some months and none in others, but this would not be a determining factor in concluding whether the contract met the criteria s. to be accounted for as a serie 132 IFRS 15.BC113, BC116. Updated October 2018 108 A closer look at IFRS 15, the revenue recognition standard

109 Frequently asked questions (cont’d) - Question 4 5: In order to apply the series requirement, does the accounting result need to be the same as if the underlying distinct goods or services were accounted for as separate performance obligations? [TRG meeting March 2015 – 30 Agenda paper no. 27] TRG members generally agreed that the accounting result does not need to be the same. Furthermore, an entity is not required to prove that the result would be the same as if the goods or services were accounted for as separate performance obligations. Ques tion 4 - 6: In order to apply the series requirement, how should an entity consider whether a performance obligation consists of distinct goods or – services that are ‘substantially the same’? [TRG meeting 13 July 2015 Agenda paper no. 39] As discussed above, TRG members generally agreed that the TRG paper, which primarily focused on the application of the series requirement to service contracts, will help entities understand how to determine whether a performance obligation consists of dis tinct goods or services that are ‘substantially the same’ under IFRS 15. The TRG agenda paper noted that, when making the evaluation of whether goods or services are distinct and substantially the same, an entity first needs to determine the nature of the entity’s promise in providing services to the customer. That is, if the nature of the promise is to deliver a specified quantity of service (e.g., monthly payroll services over a defined contract period), the evaluation should consider whether each servi ce is distinct and substantially the same. In contrast, if the nature of the entity’s promise is to stand ready or provide a single service for a period of time (i.e., because there is an unspecified quantity to be delivered), the evaluation would conside r whether each time increment (e.g., hour, day), rather than the underlying activities, is distinct and substantially the same. The TRG agenda paper noted that the Board intended that a series could consist of either specified quantities of the underlying good or service delivered (e.g., each unit of a good) or distinct time increments (e.g., an hourly service), dependin g on the nature of the promise. As discussed above in s ection 4.2.2, it is important to highlight that the underlying activities an entity performs to satisfy a performance obligation could vary significantly throughout a day and from day to day. However, the TRG agenda paper noted that this not determinative in the assessment s that are of whether a performance obligation consists of goods or service distinct and substantially the same. Consider an example where the nature of the promise is to provide a daily hotel management service. The hotel management service comprises various activities that may vary each day (e.g., cleaning services, reservation services, property maintenance). However, the entity determines that the daily hotel management services are substantially the same because the nature of the entity’s promise is the same each day and the entity is providing the same overa ll man agement service each day. The TRG agenda paper included several examples of promised goods or services that may meet the series requirement and the analysis that supports that conclusion. The evaluation of the nature of the promise for each example istent with Example 13 of IFRS 15 on monthly payroll processing. is cons A closer look at IFRS 15, the revenue recognition standard Updated October 2018 109

110 Frequently asked questions (cont’d) Below we have summarised some of the examples and analysis in the TRG agenda paper. Example of IT outsourcing - year information technology (IT) A vendor and customer execute a 10 outsourcing arrangement in which the vendor continuously delivers the outsourced activities over the contract term (e.g., it provides server capacity, manages the customer’s software portf olio, runs an IT help desk). The total monthly invoice is calculated based on different units consumed for the respective activities. The vendor concludes that the customer simultaneously receives and consumes the benefits provided by its services as it p erforms (meeting the over - time criterion in IFRS 15.35(a)). The vendor first considers the nature of its promise to the customer. Because the vendor has promised to provide an unspecified quantity of activities, rather than a defined number of services, the TRG agenda paper noted that the vendor could reasonably co nclude that the nature of the promise is an obligation to stand ready to provide the integrated outsourcing service each day. If the nature of the promise is the overall IT outsourcing service, each day of service could be considered distinct because the customer can benefit from each day of service on its own and each day is separately identifiable. The TRG agenda paper also noted that the vendor could reasonably conclude that each day of service is substantially the same. That is, even if the individ ual activities that comprise the performance obligation vary from day to day, the nature of the overall promise is the same from day to day. Accordingly, it would be reasonable for an entity to conclude that this contract meets the series requirement. t ransaction processing E xample of A vendor enters into a 10 - year contract with a customer to provide continuous access to its system and to process all transactions on behalf of the customer. The customer is obligated to use the vendor’s system, but the ultimate quantity of transactions is unknown. The vendor concludes that the customer simultaneously receives and consumes the benefits as it performs. If the vendor concludes t hat the nature of its promise is to provide continuous access to its system, rather than process a particular quantity of transactions, it might conclude that there is a single performance stomer obligation to stand ready to process as many transactions as the cu requires. If that is the case, the TRG agenda paper noted that it would be reasonable to conclude that there are multiple distinct time increments of the service. Each day of access to the service provided to the customer ntially the same since the customer is deriving could be considered substa a consistent benefit from the access each day, even if a different number actions are processed each day. of trans Updated October 2018 110 A closer look at IFRS 15, the revenue recognition standard

111 Frequently asked questions (cont’d) Example of (cont’d) transaction processing If the vendor concludes that the nature of the promise is the processing of each transaction, the TRG agenda paper noted that each transaction processed could be considered substantially the same even if there are multiple types of transactions that gene rate different payments. Furthermore, the TRG agenda paper noted that each transaction processed could be a distinct service because the customer could benefit from each transaction on its own and each transaction could be separately identifiable. Accordin gly, it would be reasonable for an entity to conclude that this contract meets the series requirement. Example of h otel management A hotel manager (HM) enters into a 20 - year contract to manage properties on behalf of a customer. HM receives monthly consideration of 1% of the monthly rental revenue, as well as reimbursement of labour costs incurred to perform the service and an annual incentive payment. HM concludes that the customer simultaneously receives and consumes the benefits of its services as it performs. HM considers the nature of its promise to the customer. If the nature of its promise is the overall management service (because the underlying activities are not distinct from each other), the TRG agenda paper noted could be considered distinct because the customer that each day of service can benefit from each day of service on its own and each day of service is separately identifiable. Assuming the nature of the promise is the overall management service, service performed each day could the TRG agenda paper noted that the be considered distinct and substantially the same. This is because, even if the individual activities that comprise the performance obligation vary significantly throughout the day and from day to day, the nature of the o verall promise to provide the management service is the same from day to day. Accordingly, it would be reasonable for an entity to conclude that this contract meets the series requirement. Question 4 - 7: Can an entity choose whether to apply the series req uirement ? No. As discussed above, if a series of distinct goods or services meets the criteria in IFRS 15.22 (b) and 23 , an entity is required to treat that series as an ). requirement ., it is not optional a single performance obligation (i.e A closer look at IFRS 15, the revenue recognition standard Updated October 2018 111

112 4.2.3 Examples of identifying performance obligations The standard includes several examples that illustrate the application of the requirements for identifying performance obligations. The examples explain to transfer goods the judgements made to determine whether the promises or services are capable of being distinct and distinct within the context of the contract. We have extracted these examples below. The following example illustrates contracts with promised goods or services that, while capable of being distinct, are not distinct within the context of the contract because of a significant integration service that combines the inputs (the underlying goods or services) into a combined output: Extract from IFRS 15 - 48C) IE Example 10 — Goods and services are not dis tinct (IFRS 15.IE45 Case A Significant integration service — An entity, a contractor, enters into a contract to build a hospital for a customer. The entity is responsible for the overall management of the project and identifies various promised goods and services, including engineering, site clearance, foundation, procurement, construction of the structure, piping and wiring, installation of equipment and finishing. The promised goods and services are capable of being distinct in accordance with paragraph 27(a) of IFRS 15. That is, the customer can benefit from the goods and services either on their own or together with other readily enced by the fact that the entity, or available resources. This is evid competitors of the entity, regularly sells many of these goods and services separately to other customers. In addition, the customer could generate economic benefit from the individual goods and services by using, uming, cons selling or holding those goods or services. However, the promises to transfer the goods and services are not separately identifiable in accordance with paragraph 27(b) of IFRS 15 (on the basis of enced by the fact that the factors in paragraph 29 of IFRS 15). This is evid the entity provides a significant service of integrating the goods and services (the inputs) into the hospital (the combined output) for which the customer has contracted. Because both criteria in paragraph 27 of IFRS 15 are not met , the goods and services are not distinct. The entity accounts for all of the goods and services in the contract as a single performance obligation. Updated October 2018 112 A closer look at IFRS 15, the revenue recognition standard

113 Extract from IFRS 15 (cont’d) Case B — Significant integration service An entity enters into a contract with a customer that will result in the delivery of multiple units of a highly complex, specialised device. The terms of the contract require the entity to establish a manufacturing process in order to produce the contracte d units. The specifications are unique to the customer, based on a custom design that is owned by the customer and that were developed under the terms of a separate contract that is for not part of the current negotiated exchange. The entity is responsible the overall management of the contract, which requires the performance and integration of various activities including procurement of materials, identifying and managing subcontractors, and performing manufacturing, assembly and testing. The entity assesses the promises in the contract and determines that each of the promised devices is capable of being distinct in accordance with paragraph 27(a) of IFRS 15 because the customer can benefit from each device on its own. This is because each unit can function independently of the other units. The entity observes that the nature of its promise is to establish and provide a service of producing the full complement of devices for which the customer has contracted in accordance with the customer’s specifications. The entity considers that it is res ponsible for overall management of the contract and for providing a significant service of integrating various goods and services (the inputs) into its overall service and the resulting devices ous promised (the combined output) and, therefore, the devices and the vari goods and services inherent in producing those devices are not separately identifiable in accordance with paragraph 27(b) and paragraph 29 of IFRS 15. In this case, the manufacturing process provided by the entity with the customer. In addition, the nature of the is specific to its contract entity’s performance and, in particular, the significant integration service of the various activities means that a change in one of the entity’s activities on the other activities to produce the devices has a significant effect required to produce the highly complex, specialised devices such that the entity’s activities are highly interdependent and highly interrelated. Because the criterion in paragraph 27(b) of IFRS 15 is not met, the goods and services that will be provided by the entity are not separately identifiable and, therefore, are not distinct. The entity accounts for all of the goods and services promised in the contract as a single performance obligation. The determination of whether a ‘signi ficant integration service’ exists within a contract, as illustrated in Case A and Case B above, require s significant judgement and is heavily dependent on the unique facts and circumstances for each individual contract with a customer. The following exa mple illustrates how the significance of installation services can affect an entity’s conclusion about the number of identified performance obligations for similar fact patterns. In Case A, each of the promised goods and nct. In Case B, two of the promised goods services are determined to be disti and services are combined into a single performance obligation because one promise (the installation) significantly customises another promise (the software). A closer look at IFRS 15, the revenue recognition standard Updated October 2018 113

114 Extract from IFRS 15 whether goods or services are distinct — Determining Example 11 (IFRS - IE58) 15.IE49 — Distinct goods or services Case A An entity, a software developer, enters into a contract with a customer to transfer a software licence, perform an installation service and provide unspecified so ftware updates and technical support (online and telephone) - year period. The entity sells the licence, installation service and for a two technical support separately. The installation service includes changing the web screen for each type of user (for example, marketing, inventory management and information technology). The installation service is routinely performed by other entities and does not significantly modify the software. The software remains function al without the updates and the technical support. The entity assesses the goods and services promised to the customer to determine which goods and services are distinct in accordance with paragraph 27 of IFRS 15. The entity observes that the software is delivered before the other goods and services and remains functional without the updates and the technical support. The customer can benefit from the updates together with the software licence transferred at the start of the contract. Thus, the entity conc ludes that the customer can benefit from each of the goods and services either on their own or together with the other goods and services that are readily available and the criterion in paragraph 27(a) of IFRS 15 is met. nciple and the factors in paragraph 29 of The entity also considers the pri IFRS 15 and determines that the promise to transfer each good and service to the customer is separately identifiable from each of the other promises (thus the criterion in paragraph 27(b) of IFRS 15 is met). In rea ching this determination, the entity considers that, although it integrates the software into the customer’s system, the installation services do not significantly affect the customer’s ability to use and benefit from the software licence because llation services are routine and can be obtained from alternative the insta providers. The software updates do not significantly affect the customer’s ability to use and benefit from the software licence during the licence period. The entity further observes that no ne of the promised goods or services significantly modify or customise one another, nor is the entity providing a significant service of integrating the software and the services into a combined output. Lastly, the entity concludes that the software and th e services do not significantly affect each other and, therefore, are not highly interdependent or highly interrelated, because the entity would be able to fulfil its promise to transfer the initial software licence independently from its promise to subse quently provide the installation service, software updates or technical support. On the basis of this assessment, the entity identifies four performance obligations in the contract for the following goods or services: (a) t he software licence; (b) a n installation service; updates; and (c) s oftware echnical support. t (d) Updated October 2018 114 A closer look at IFRS 15, the revenue recognition standard

115 Extract from IFRS 15 (cont’d) The entity applies paragraphs 31 – 38 of IFRS 15 to determine whether each of the performance obligations for the installation service, software updates and technical support are satisfied at a point in time or over time. The entity also assesses the nature of the entity’s promise to transfer the software licence in accordance with paragraph B58 of IFRS 15 (see Example 54 in paragraphs IE276 – IE277). Case B — Significant customisa tion The promised goods and services are the same as in Case A, except that the contract specifies that, as part of the installation service, the software is to be substantially customised to add significant new functionality to enable the interface with other customised software applications used by software to the customer. The customised installation service can be provided by other entities. The entity assesses the goods and services promised to the customer to determine which goods and services are distinct in accordance with paragraph 27 of IFRS 15. The entity first assesses whether the criterion in paragraph 27(a) has been met. For the same reasons as in Case A, the entity determines that the software licence, installation, software updates and technical support each meet that criterion. The entity next assesses whether the criterion in paragraph 27(b) has been met by evaluating the principle and the factors in paragraph 29 of IFRS 15. The entity observes that the terms of a promise to provide a significant service of integrating the contract result in the licenced software into the existing software system by performing a customised installation service as specified in the contract. In other words, ised installation service as inputs the entity is using the licence and the custom to produce the combined output (ie a functional and integrated software system) specified in the contract (see paragraph 29(a) of IFRS 15). The software is significantly modified and customised by the service (see paragr aph 29(b) of IFRS 15). Consequently, the entity determines that the promise to transfer the licence is not separately identifiable from the customised installation service and, therefore, the criterion in paragraph 27(b) of IFRS 15 is not met. Thus, the software licence and the customised installation service are not distinct. On the basis of the same analysis as in Case A, the entity concludes that the software updates and technical support are distinct from the other promises in the contract. On the ba sis of this assessment, the entity identifies three performance obligations in the contract for the following goods or services: (a) s oftware customisation (which comprises the licence for the software and the customised installation service); (b) s oftware updates ; and t support. echnical (c) The entity applies paragraphs 31 38 of IFRS 15 to determine whether – each performance obligation is satisfied at a point in time or over time. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 115

116 The following examples illustrate contracts that include multiple promised goods or services, all of which are determined to be distinct. The example highlights the importance of considering both the separately identifiable principle and the underlying factors in IFRS 15.29. Case C illustrates a contract that includes the sale of equipmen t and installation services. The equipment can be operated without any customisation or modification. The installation is not complex and can be performed by other . The entity determines that the two promises in the contract are entities distinct. Case D i llustrates that certain types of contractual restrictions, including those that require a customer to only use the entity’s services, should not affect the evaluation of whether a promised good or service is distinct. Case E illustrates a contract that inc ludes the sale of equipment and specialised consumables to be used with the equipment. Even though the consumables can only be produced by the entity, they are sold separately. The entity determines that the two promises in the contract are distinct and th e example walks through the analysis for determining whether the promises are capable of being distinct and distinct in the context of the contract. As part of this analysis, the entity concludes that the equipment and consumables are not highly interrela ted n or highly interdependent because the two promises do not each significantly affect each other. That is, the entity would be able to fulfil of its promises in the contract independently of the other promises. Extract from IFRS 15 Determi Example 11 — ning whether goods or services are distinct (IFRS 15.IE58A - IE58K) — Promises are separately identifiable (installation) Case C An entity contracts with a customer to sell a piece of equipment and any customisation installation services. The equipment is operational without or modification. The installation required is not complex and is capable of being performed by several alternative service providers. The entity identifies two promised goods and services in the contract: (a) equipment and (b) installation. The entity assesses the criteria in 27 of IFRS 15 to determine whether each promised good or paragraph service is distinct. The entity determines that the equipment and the installation each meet the criterion in paragra ph 27(a) of IFRS 15. The customer can benefit from the equipment on its own, by using it or reselling it for an amount greater than scrap value, or together with other readily available resources (for example, installation services available from ive providers). The customer also can benefit from the installation alternat services together with other resources that the customer will already have obtained from the entity (ie the equipment). The entity further determines that its promises to transfer the equi pment and to provide the installation services are each separately identifiable (in accordance with paragraph 27(b) of IFRS 15). The entity considers the principle and the factors in paragraph 29 of IFRS 15 in determining that llation services are not inputs to a combined item the equipment and the insta in this contract. In this case, each of the factors in paragraph 29 of IFRS 15 contributes to, but is not individually determinative of, the conclusion that the Updated October 2018 116 A closer look at IFRS 15, the revenue recognition standard

117 Extract from IFRS 15 (cont’d) and the installation services are separately identifiable as follows: equipment The entity is not providing a significant integration service. That is, (a) the entity has promised to deliver the equipment and then install it; the entity would be able to fulfil its pro mise to transfer the equipment separately from its promise to subsequently install it. The entity has not promised to combine the equipment and the installation services in a way that would transform them into a combined output. (b) services will not significantly customise or The entity’s installation significantly modify the equipment. (c) Although the customer can benefit from the installation services only after it has obtained control of the equipment, the installation services do not significantly affect t he equipment because the entity would be able to fulfil its promise to transfer the equipment independently of its promise to provide the installation services. Because the equipment and the installation services do not each significantly affect the other , they are not highly interdependent or highly interrelated. On the basis of this assessment, the entity identifies two performance obligations in the contract for the following goods or services: (i) t he equipment; and i nstallation services. (ii) The entity applies paragraphs 31 38 of IFRS 15 to determine whether – each performance obligation is satisfied at a point in time or over time. Case D — Promises are separately identifiable (contractual restrictions) Assume the same facts as in Case C, except that the customer is contractually required to use the entity’s installation services. The contractual requirement to use the entity’s installation services does not change the evaluation of whether the promised goods and services are distinct in this case. This is because the contractual requirement to use the entity’s installation services does not change the characteristics of the goods or services themselves, nor does it change the entity’s promises to the to use the entity’s installation customer. Although the customer is required services, the equipment and the installation services are capable of being 15) and distinct (ie they each meet the criterion in paragraph 27(a) of IFRS the entity’s promises to provide the equipment and to provide the inst allation services are each separately identifiable, ie they each meet the criterion in paragraph 27(b) of IFRS 15. The entity’s analysis in this regard is consistent with that in Case C. Case E — Promises are separately identifiable (consumables) An entity e nters into a contract with a customer to provide a piece of off - the - shelf equipment (ie the equipment is operational without any significant customisation or modification) and to provide specialised consumables for tervals over the next three years. use in the equipment at predetermined in The consumables are produced only by the entity, but are sold separately by the entity. The entity determines that the customer can benefit from the equipment together with the readily available consumables. The consumab les are readily available in accordance with paragraph 28 of IFRS 15, because they are A closer look at IFRS 15, the revenue recognition standard Updated October 2018 117

118 Extract from IFRS 15 (cont’d) regularly sold separately by the entity (ie through refill orders to customers that previously purchased the equipment). The customer can benefit from the consumables that will be delivered under the contract together with the delivered equipment that is transferred to the customer initially under the contract. Therefore, the equipment and the consumables are each capable of being distinct in accordance with paragraph 27(a) of IFRS 15. The entity determines that its promises to transfer the equipment and to provide consumables over a three - year period are each separately identifiable in accordance with paragraph 27(b) of IFRS 15. In determining that the equipment and the consumables are not inputs to a combined item in this contract, the entity considers that it is not providing a significant integration service that transforms the equipment and consumables into a combined output. In addition, neither the equipment nor the consumables are significantly customised or modified by the other. Lastly, the ent ity concludes that the equipment and the consumables are not highly interdependent or highly interrelated because they do not significantly affect each other. Although the customer can benefit from the consumables in this contract only after it has obtain ed control of the equipment (ie the consumables would have no use without the equipment) and the consumables are required for the equipment to function, the equipment and the consumables do not each significantly affect the other. This is because the ent ity would be able to fulfil each of its promises in the contract independently of the other. That is, the entity would be able to fulfil its promise to transfer the equipment even if the customer did not purchase any consumables and would be able to fulfi l its promise to provide the consumables, even if the customer acquired the equipment separately. On the basis of this assessment, the entity identifies two performance obligations in the contract for the following goods or services: (a) t he equipment; and (b) t he consumables. The entity applies paragraphs 31 – 38 of IFRS 15 to determine whether each performance obligation is satisfied at a point in time or over time. 4.3 Promised goods or services that are not distinct If a promised good or service does not meet the criteria to be considered distinct, an entity is required to combine that good or service with other promised goods or services until the entity identifies a bundle of goods or services that, together, is dis tinct. This could result in an entity combining a good or service that is not considered distinct with another good or service that, on its own, would have met the criteria to be considered distinct (see s ection 4.2.1). The standard provides two examples of contracts with promised goods or services that, while capable of being distinct, are not distinct in the context of the contract because of a significant integration service that combines the ods or services) into a combined output. Full extracts inputs (the underlying go of these examples (Example 10, Case A, and Example 10, Case B) are included ection 4.2.3 above. s in Updated October 2018 8 11 A closer look at IFRS 15, the revenue recognition standard

119 4.4 Principal versus agent considerations October (updated 2018) in providing goods or services to a When more than one party is involved customer, the standard requires an entity to determine whether it is a principal or an agent in these transactions by evaluating the nature of its promise to the therefore, recor customer. An entity is a principal (and, ds revenue on a gross basis) if it controls a promised good or service before transferring that good or service to the customer. An entity is an agent (and, therefore, records as revenue the net amount that it retains for its agency services) if its role i s to arrange for another entity to provide the goods or services. In the Basis for Conclusions, the Board explained that in order for an entity to conclude that it is providing the good or service to the customer, it must first control that good or service . That is, the entity cannot provide the good or service to a customer if the entity does not first control it. If an entity controls the good or service, the entity is a principal in the transaction. If an entity does not control the good or service befo re it is transferred to the customer, 133 the entity is an agent in the transaction. In the Basis for Conclusions, the Board noted that an entity that itself manufactures a good or performs a service is always a principal if it transfers control of that good or service to another party. There is no need for such an entity to evaluate the principal versus agent application guidance because it transfers control of or provides its own good or service directly to its customer without the involvement of another p arty. For example, if an entity transfers control of a good to an intermediary that is a principal in providing that good to an end - customer, the entity records revenue as a principal in 134 the sale of the good to its customer (the intermediary). it How we see Consistent with practice , entities need to carefully under legacy IFRS 15 evaluate whether a gross or net presentation is appropriate. IFRS includes application guidance on determining whether an entity is a principal or agent in an arrangement that is similar to legacy IFRS. However, the key diff erence is that the standard focuses on control of the specified goods or services as the overarching principle for entities to consider in determining whether they are acting as a principal or an agent. That is, an entity first s whether it control s the specified good or service before reviewing evaluate the standard ’ s principal indicators. This could result in entities reaching . different conclusions than they d under legacy IFRS id 133 IFRS 15.BC385D. 134 IFRS 15.BC385E. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 119

120 IFRS 15 states the overall principle for the principal versus agent evaluati on as follows: Extract from IFRS 15 B34. When another party is involved in providing goods or services to a customer, the entity shall determine whether the nature of its promise is a performance obligation to provide the specified goods or services itself the entity is a principal) or to arrange for those goods or services to be (ie provided by the other party (ie the entity is an agent). An entity determines whether it is a principa l or an agent for each specified good or service promised to the customer. A specified good or service is a distinct good or service (or a distinct bundle of goods or services) to be provided to the customer (see paragraphs 27 – 30). If a contract with a cu stomer includes more than one specified good or service, an entity could be a principal for some specified goods or services and an agent for others. B34A. To determine the nature of its promise (as described in paragraph B34), the entity shall: (a) he specified goods or services to be provided to the customer i dentify t (which, for example, could be a right to a good or service to be provided by another party (see paragraph 26)); and whether it controls (as described in paragraph 33) each specified a ssess (b) good or service before that good or service is transferred to the customer. B35. An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. However, an entity does not necessarily control a sp ecified good if the entity obtains legal title to that good only momentarily before legal title is transferred to a customer. An entity that is a principal may satisfy its performance obligation to provide the specified good or service itself or it may e ngage another party (for example, a subcontractor) to satisfy some or all of the performance obligation on its behalf. The following flow chart illustrates the process for performing a principal versus agent evaluation: one party involved in providing Is more than goods or services to a customer? Yes No No principal/agent Identify the specified goods or services to be evaluation. provided to the customer (see section 4.4.1) . Indicators For each specified good or service, does the If it is unclear whether the entity entity control it before it is transferred to the controls a specified good or service part of this customer (see section 4.4.2)? As after consideration of the definition of analysis, entities are required to consider the control in IFRS 15.33 , consider the and, as definition of control in IFRS 15.33 IFRS 15.B37 following indicators from additional support, may find it helpful to as additional support (see IFRS 15.B37 . consider the indicators in section 4.4.2.A): The entity is primarily responsible • Yes No for fulfilment and acceptability. e revenue s Recogni s Recogni e revenue The entity has inventory risk before • net as the agent gross as the principal or after transfer to customer. for the specific for the specified good The entity has discretion in setting • good or service. or service. the price. 120 Updated October 2018 A closer look at IFRS 15, the revenue recognition standard

121 How we see it he principal versus agent application guidance the T applies regardless of or the industry in which the entity type of transaction under evaluation operates. E : (a) do not stock inventory and may employ ntities that independent warehouses or fulfilment houses to drop ship merchandise - to customers on their behalf or (b) offer services to be provided by an ; independent service provider (e.g., travel agents, magazine subscription u e s or that sell goods brokers and retailers that sell goods through catalog on consignment) may need to apply significant judgement when applying th is application guidance . 4.4.1 Identifying the specified good or service In accordance with IFRS 15.B34A, an entity must first identify the specified good for the principal versus agent evaluation) to be or service (or unit of account provided to the customer in the contract in order to determine the nature of its promise (i.e., whether it is to provide the specified goods or services or to arrange for those goods or services to be provided by another party). A specified good or service is defined as “a distinct good or service (or a distinct bundle of 135 goods or services) to be provided to the customer”. While this definition is similar to that of a performance obligation (see s ection 4.2), the IASB noted in the Basis for Conclusions that it created this new term because using 136 ‘performance obligation’ would have been confusing in agency relationships. That is, because an agent’s performance obligation is to arrange for goods or services to be provided by anothe r party, providing the specified goods or services to the end - customer is not the agent’s performance obligation. A specified good or service may be a distinct good or service or a distinct bundle of goods services. In the Basis for Conclusions, the Boa rd noted that if or individual goods or services are not distinct from one another, they may be inputs to a combined item and each good or service may represent only a part of a single promise to the customer. For example, in a contract in which goods or serv ices provided by another party are inputs to a combined item (or items), the entity would assess whether it controls the combined item (or items) before 137 that item (or items) is transferred to the customer. That is, in determining whether it is a principal or an agent, an entity should evaluate that single promise to the customer, rather than the individual inputs that make up that promise. Appropriately identifying the good or service to be provided is a critical step in determining whether an entity is a principal or an agent in a transaction. In many situations, especially those involving tangible goods, identifying the specified good or service is relatively straightforward. For example, if an entity is reselling laptop computers, the specified good that is transferred to the customer is a laptop computer. However, the assessment may require significant judgement in other situations, ith such as those involving intangible goods or services. In accordance w IFRS 15.B34A(a), the specified good or service may be the underlying good or service a customer ultimately wants to obtain (e.g., a flight, a meal) or a right to obtain that good or service (e.g., in the form of a ticket or voucher). In the Basis for C onclusions, the Board noted that when the specified good or service is a right to a good or service that will be provided by another party, the entity would determine whether its performance obligation is a promise to provide 135 IFRS 15.B34. 136 IFRS 15.BC385B. 137 IFRS 15.BC385Q. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 121

122 that right (and it is, theref ore, a principal) or whether it is arranging for the other party to provide that right (and it is, therefore, an agent). The fact that the entity not provide the underlying goods or services itself is not does 138 determinative. The Board acknowledged that it may be difficult in some cases to determine whether the specified good or service is the underlying good or service or a right to obtain that good or service. Therefore, it provided examples in s ection 4.4. 4) involves an airline the standard. Example 47 (extracted in full in - purchases airline tickets that it ticket reseller. In this example, the entity pre will later sell to customers. While the customer ultimately wants airline travel, the conclusion in Example 47 is that the specified good or service is the right to fly on a specified flight (in the form of a ticket) and not the underlying flight itself. The entity itself does not fly the plane and it cannot change the service change the flight time or destination). However, the entity obtained (e.g., the ticket prior to identifying a specific customer to purchase the ticket. As a result, the entity holds an asset (in the form of a ticket) that represents a right to fly. The entity could, therefore, transfer that right to a customer (as depicted in th e example) or decide to use the right itself. Example 46A (extracted in full in ection 4.4.4) involves an office maintenance s service provider. In this example, the entity concludes that the specified good or service is the underlying office maintenance s ervice (rather than a right to that service). While the entity obtained the contract with the customer prior to engaging a third party to perform the requested services, the right to the subcontractor’s services never transfers to the customer. Instead, the entity retains the right to direct the service provider. That is, the entity can direct to fulfil the the right to use the subcontractor’s services as it chooses (e.g., customer contract, to fulfil another customer contract, to service its own facilit ies). Furthermore, the customer in Example 46A is indifferent as to who carries out the office maintenance services. This is not the case in Example 47, in which the customer wants the ticket reseller to sell one of its tickets on a specific flight. ontract with a customer includes more than one specified good or service, If a c IFRS 15 clarifies that an entity may be a principal for some specified goods 139 or services and an agent for others. Example 48A in IFRS 15 provides an illustration of this. How we s ee it As discussed above, appropriately identifying the specified good or service to be provided to the customer is a critical step in identifying whether the nature of an entity’s promise is to act as a principal or an agent. Entities need to carefully e may need to apply xamine their contract terms and significant judgement to determine whether the specified good or service is the underlying good or service or a right to obtain that good or service. 4.4.2 Control of the specified good or service In accordance with IFRS 15.B34A, the second step in determining the nature of the entity’s promise (i.e., whether it is to provide the specified goods or services or to arrange for those goods or services to be provided by another party) is for the entity to determine whether the entity controls the specified good or service before it is transferred to the customer. An entity cannot provide the specified good or service to a customer (and, therefore, be a principal) unless it controls 138 IFRS 15.BC385O. 139 IFRS 15.B34. Updated October 2018 122 A closer look at IFRS 15, the revenue recognition standard

123 that good or service prio r to its transfer. That is, as the Board noted in the Basis for Conclusions, control is the determining factor when assessing whether an 140 entity is a principal or an agent. In assessing whether an entity controls the specified good or service prior to tran sfer to the customer, IFRS 15.B34A(b) requires the entity to consider the definition of control that is included in Step 5 of the model, in accordance with section 7) . IFRS 15.33 (discussed further in entity concludes that it If, after evaluating the requirement in IFRS 15.33, an controls the specified good or service before it is transferred to the customer, the entity is a principal in the transaction. If the entity does not control that good or service before transfer to the customer, it is an agent. keholder feedback indicated that the control principle was easier to apply to Sta or services because intangible goods tangible goods than to intangible goods or services generally exist only at the moment they are delivered. To address this concern, the stan dard includes application guidance on how the control principle applies to certain types of arrangements (including service transactions) by explaining what a principal controls before the specified good or service is transferred to the customer: from IFRS 15 Extract B35A. When another party is involved in providing goods or services to a customer, an entity that is a principal obtains control of any one of the following: (a) a good or another asset from the other party that it then transfers to the custom er. (b) a right to a service to be performed by the other party, which gives the entity the ability to direct that party to provide the service to the customer on the entity’s behalf. good or service from the other party that it then combines with (c) a other goods or services in providing the specified good or service to the customer. For example, if an entity provides a significant service of integrating goods or services (see paragraph 29(a)) provided by another party into the specified good or servic e for which the customer has contracted, the entity controls the specified good or service before that good or service is transferred to the customer. This is because the entity first obtains control of the inputs to the specified good or service (which cludes goods or services from other parties) and directs their use to in create the combined output that is the specified good or service. In the Basis for Conclusions, the Board observed that an entity can control a service to be provided by another party when it controls the right to the 141 specified service that will be provided to the customer. Generally, the entity then either transfer s the right (in the form of an asset, such as a ticket) to its customer, in accordance with IFRS 15.B35A(a) (as in Exampl e 47 involving the airline ticket reseller discussed in s ection 4.4.1) or use its right to direct the other party to provide the specified service to the customer on the entity’s behalf, in accordance with IFRS 15.B35A(b) (as in Example 46A involving the office maintenance services discussed in s ection 4.4.1). The condition described in IFRS 15.B35A(a) include s contracts in which an entity transfers to the customer a right to a future service to be provided by 140 IFRS 15.BC385S. 141 IFRS 15.BC385U. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 123

124 another party. If the specified good or servi ce is a right to a good or service to be provided by another party, the entity evaluates whether it controls the right to the goods or services before that right is transferred to the customer (rather es). In the Basis for than whether it controls the underlying goods or servic Conclusions, the Board noted that, in assessing such rights, it is often relevant to assess whether the right is created only when it is obtained by the customer or whether the right exists before the customer obtains it. If the right does not exist before the customer obtains it, an entity would not be able to control right 142 before it is transferred to the customer. The standard includes two examples to illustrate this point. In Example 47 (discussed above in s ection 4.4.1 and extract s ection 4.4.4) involving ed in full in an airline ticket reseller, the specified good or service is determined to be the right to fly on a specified flight (in the form of a ticket). One of the determining factors for the principal - agent evaluation in this example is that the entity pre - purchases the airline tickets before a specific customer is identified. Accordingly, the right existed prior to a customer obtaining it. The example concludes that the entity controls the right before it is transferred to t he customer (and is, therefore, a principal). In Example 48 (extracted in full in s ection 4.4.4), an entity sells vouchers that entitle customers to future meals at specified restaurants selected by the customer. The specified good or service is determin ed to be the right to a meal (in the form of a voucher). One of the determining factors for the principal - agent evaluation is that the entity does not control the voucher (the right to a meal) at any time. It does not pre - purchase or commit itself to purc hase the vouchers from the restaurants before they are sold to a customer. Instead, the entity waits to purchase the voucher until a customer requests a voucher for a particular restaurant. In addition, vouchers are created only at the time e transferred to a customer and do not exist before that transfer. that they ar Accordingly, the right does not exist before the customer obtains it. Therefore, the entity does not at any time have the ability to direct the use all of the remaining benefits from the of the vouchers or obtain substantially vouchers before they are transferred to customers. The example concludes that the entity does not control the right before it is transferred to the customer (and is, therefore, an agent). In the Basis for Conclusions , the IASB acknowledged that determining whether an entity is a principal or an agent may be more difficult when evaluating whether a contract falls under IFRS 15.B35A(b). That is, it may be difficult to determine whether an entity has the ability to direct another party to provide the service on its behalf (and is, therefore, a principal) or is only arranging for the other party to provide the service (and is, therefore, an agent). As depicted in Exam ple 46A (as discussed in s ection 4.4.1 and extracted in full in 4.4.4), an entity could control the right to the specified service and be s ection a principal by entering into a contract with the subcontractor in which the entity defines the scope of servi ce to be performed by the subcontractor on its behalf. This situation is equivalent to the entity fulfilling the contract using its own resources. Furthermore, the entity remain s responsible for the satisfactory provision of the specified service in acco rdance with the contract with the customer. In contrast, when the specified service is provided by another party and the entity does not have the ability to direct those services, the entity typically is an agent because the entity is facilitating, rather than 143 controlling the rights to, the service. 142 IFRS 15.BC385O. 143 IFRS 15.BC385V. Updated October 2018 124 A closer look at IFRS 15, the revenue recognition standard

125 In accordance with IFRS 15.B35A(c), if an entity provides a significant service of integrating two or more goods or services into a combined item that is the o receive, the entity specified good or service the customer contracted t controls that specified good or service before it is transferred to the customer. This is because the entity first obtains control of the inputs to the specified good or service (which can include goods or services from other parties) and directs their use to create the combined item that is the specified good or service. The inputs would be a fulfilment cost to the entity. However, as noted by the Board in the Basis for Conclusions, if a third party provides the significant integratio n service, the entity’s customer for its good or services (which would be inputs to 144 the specified good or service) is likely to be the third party. 4.4.2.A Principal indicators After considering the application guidance discussed above, it still may not b e clear whether an entity controls the specified good or service. Therefore, the standard provides three indicators of when an entity controls the specified good or service (and is, therefore, a principal): Extract from IFRS 15 B37. Indicators that an entity controls the specified good or service before it is transferred to the customer (and is therefore a principal (see B35)) include, but are not limited to, the following: paragraph t he entity is primarily responsible for fulfi lling the promise to provide (a) the specified good or service. This typically includes responsibility for the acceptability of the specified good or service (for example, primary responsibility for the good or service meeting customer specifications). If th e entity is primarily responsible for fulfilling the promise to provide the specified good or service, this may indicate that the other party involved in providing the specified good or service is acting on the entity’s behalf. (b) t he entity has inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer (for example, if the customer has a right of return). For example, if the entity obtains, or commits itself to obtain, the specified g ood or service before obtaining a contract with a customer, that may indicate that the entity has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the good or service before it is transferred to the customer. (c) t he entity has discretion in establishing the price for the specified good or service. Establishing the price that the customer pays for the specified good or service may indicate that the entity has the ability to direct the use of that good or service and obtain substantially all of the remaining benefits. However, an agent can have discretion in establishing prices in some cases. For example, an agent may have some flexibility in setting prices in order to generate additional revenue from its service of a rranging for goods or services to be provided by other parties to customers. The above indicators are meant to support an entity’s assessment of control, not to replace it. Each indicator explains how it supports the assessment of control. As emphasised i n the Basis for Conclusions, the indicators do not override the assessment of control, should not be viewed in isolation and do not constitute a separate or additional evaluation. Furthermore, they should not be considered a checklist of criteria to be m et or factors to be considered in all 144 IFRS 15.BC385R. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 125

126 scenarios. IFRS 15.B37A notes that c onsidering one or more of the indicators will often be helpful and, depending on the facts and circumstances, individual indicators will be more or less relevant or persuasive to the assessment of 145 control. If an entity reaches different conclusions about whether it controls the specified good or service by applying the standard’s definition of control - versus the principal indicators, the entity should re evaluate its assessment, cons idering the facts and circumstances of its contract. This is because an entity’s conclusions about control and the principal indicators should align. The first indicator that an entity is a principal, in IFRS 15.B37(a), is that the entity is primarily resp onsible for both fulfilling the promise to provide the specified good or service to the customer and for the acceptability of the specified good or service. We believe that one of the reasons that this indicator supports the assessment of control of the sp ecified good or service is because s a specified good or service that it is responsible for an entity generally control transferring control to a customer. The terms of the contract and representations (written or otherwise) made by an entity during marketi ng generally provide evidence of which party is responsible for fulfilling the promise to provide the specified good or service and for the acceptability of that good or service. It is possible that one entity may not be solely responsible for both provid ing the specified good or service and for the acceptability of that same good or service. For example, a reseller may sell goods or services that are provided to the customer by a supplier. However, if the customer is dissatisfied with the goods or service s it receives, the reseller may be solely responsible for providing a remedy to the customer. The reseller may promote such a role during the marketing process or may agree to such a role as claims arise in order to omer. In this situation, both the reseller maintain its relationship with its cust and the supplier possess characteristics of this indicator. Therefore, other indicators likely need to be considered to determine which entity is the principal. However, if the reseller is responsible for providi ng a remedy to a dissatisfied customer, but can then pursue a claim against the supplier to recoup any remedies it provides, that may indicate that the reseller is not ultimately responsible for the acceptability of the specified good or service. The seco nd indicator that an entity is a principal, in IFRS 15.B37(b), is that the entity has inventory risk (before the specified good or service is transferred . Inventory risk is the risk normally or upon customer return) to the customer taken by an entity that acquires inventory in the hope of reselling it at a profit. Inventory risk exists if a reseller obtains (or commits to obtain) the specified good or service before it is ordered by a customer. Inventory risk also exists if a customer has a right of return and the reseller will take back the specified good service if the customer exercises that right. This indicator supports the assessment of control of the specified good or service because when an entity obtains (or commits to obtain) the specified good or service before it has contracted with a customer, it likely has the ability to direct the use of and obtain substantially all of the remaining benefits from the good or service. For example, inventory risk can exist in a customer arrangement involving th e provision of services if an entity is obligated to compensate the individual service provider(s) for work performed, regardless of whether the customer accepts that work. However, this indicator often does not apply to intangible goods or services. 145 IFRS 15.BC385H. Updated October 2018 126 A closer look at IFRS 15, the revenue recognition standard

127 Fact ors may exist that mitigate a reseller’s inventory risk. For example, a reseller’s inventory risk may be significantly reduced or eliminated if it has the right to return to the supplier goods it cannot sell or goods that are returned er example is if a reseller receives inventory price by customers. Anoth protection from the supplier. In these cases, the inventory risk indicator may be less relevant or persuasive to the assessment of control. The third principal indicator, in IFRS 15.B37(c), is that the entity has discretion in establishing the price of the specified good or service. Reasonable latitude, within economic constraints, to establish the price with a customer for the ice may indicate that the entity has the ability to direct the product or serv use of that good or service and obtain substantially all of the remaining benefits (i.e., the entity controls the specified good or service). However, because an in establishing the price of the specified good agent may also have discretion or service, the facts and circumstances of the transaction need to be carefully evaluated. from ed legacy What’s chang IFRS? The three indicators in IFRS 15.B37 are similar to some of those included in y IFRS. However, the indicators in IFRS 15 are based on the concepts legac of identifying performance obligations and the transfer of control of goods and services. That is , under IFRS 15 , an entity must first identify the specified good or service and determi ne whether it controls that specified good or service before evaluating the indicators. The indicators serve as support for the entity’s control determination and are not a replacement of it. This is a change from IAS 18, under which an entity evaluate d t he indicators in order to make its principal versus agent determination. In addition, IFRS 15 d those relating to id not carry forward some indicators from IAS 18 (e.g., exposure to credit risk and the form of the consideration as a commission). I n the Bas is for Conclusions, the IASB acknowledged that entities could reach 146 IFRS 15 than they did under IAS 18. different conclusions under Entities should take a fresh look at their principal versus agent conclusions under IFRS 15 , focusing on their contracts an d any terms that may influence their assessment of control. 2018) 4.4.3 Recognising revenue as principal or agent (updated October The determination of whether the entity is acting as a principal or an agent affects the amount of revenue the entity . recognises When the entity is the principal in the arrangement, the revenue recognised is the gross amount to which the entity expects to be entitled. When the entity is the agent, the revenue recognised is the net amount that the entity is entitled tain in return for its services as the agent. The entity’s fee or commission to re may be the net amount of consideration that the entity retains after paying the other party the consideration received in exchange for the goods or services to be provided by that party. After an entity determines whether it is the principal or the agent and the amount of gross or net revenue that would be recognised, the entity recognises revenue An entity satisfies its when or as it satisfies its performance obligation. performan ce obligation by transferring control of the specified good or service underlying the performance obligation, either at a point in time or over time (as discussed in section 7). That is, a principal would recognise revenue when (or as) it transfers the sp ecified good or service to the customer. An agent 146 IFRS 15.BC385I. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 127

128 would recognise revenue when its performance obligation to arrange for the specified good or service is complete. In the Basis for Conclusions, the Board noted that, in some contracts in which the entity is the agent, control of specified goods or services promised by the agent may transfer before the customer receives related goods or services from the principal. For example, an entity might satisfy its promise to provide those points are transferred to the customers with loyalty points when customer if: The entity’s promise is to provide loyalty points to customers when • the customer purchases goods or services from the entity. • The points entitle the customers to future discounted purchases with rty (i.e., the points represent a material right to a future another pa discount). • The entity determines that it is an agent (i.e., its promise is to arrange for the customers to be provided with points) and the entity does not control those points (i.e., the specifi ed good or service) before they are transferred to the customer. In contrast, if the points entitle the customers to future goods or services to be provided by the entity, the entity may conclude it is not an agent. This is because the entity’s promise is to provide those future goods or services and, therefore, the entity controls both the points and the future goods or services before they are transferred to the customer. In these cases, the entity’s performance obligation may only be satisfied when the future goods or services are provided. In other cases, the points may entitle customers to choose between future goods or services provided by either the entity or another party. For example, members to redeem loyalty many airlines allow loyalty program for me points goods or services provided by a partner (e.g., travel on another airline, hotel ). In this situation, the nature of the entity’s performance accommodation obligation may not be known until the customer makes its choice. That is, until the custome the goods or services to be provided (and, therefore, r has chosen the third party will provide those goods or services), the whether the entity or entity is obliged to stand ready to deliver goods or services. Therefore, the entity may not satisfy its per formance obligation until it either delivers the goods or services or is no longer obliged to stand ready. If the customer subsequently chooses to receive the goods or services from another party, an agent and would, the entity would need to consider whether it was acting as therefore, only recognise revenue for a fee or commission that it received for 147 arranging the ultimate transaction between the customer and the third party. How we see it The above discussion illustrates that control of specified goods or services promised by an agent may transfer before the customer receives related goods or services from the principal. An entity need s to assess each loyalty programme in accordance with the principles of the principal versus agent application guidance to determine if revenue would be reported on a gross or net basis. 147 BC385. - IFRS 15.BC383 Updated October 2018 128 A closer look at IFRS 15, the revenue recognition standard

129 Although an entity may be able to transfer its obligation to provide its customer or services, the standard says that such a transfer may not specified goods always satisfy the performance obligation: Extract from IFRS 15 B38. If another entity assumes the entity’s performance obligations and contractual rights in the contract so that the entity is no longer obliged to satisfy the performance obligation to transfer the specified good or service to the customer (ie the enti ty is no longer acting as the principal), the entity shall not recognise revenue for that performance obligation. Instead, the entity shall evaluate whether to recognise revenue for satisfying a performance obligation to obtain a contract for the other pa rty (ie whether the entity is acting as an agent). 4.4.4 Examples (updated October 2018) The standard includes six examples to illustrate the principal versus agent application guidance discussed above. We have extracted four of them below. The standard includes the following example of when the specified good or ection 4.4.1) is the underlying service, rather than the right to service (see s obtain that service. The entity in this example is determined to be a principal: Extract from IFRS 15 Example 46A — Promise to provide goods or services (entity is a principal) (IFRS 15.IE238A - IE238G) An entity enters into a contract with a customer to provide office maintenance services. The entity and the customer define and agree on the scope of the services and ne gotiate the price. The entity is responsible for ensuring that the services are performed in accordance with the terms and conditions in the contract. The entity invoices the customer for the agreed - - day payment terms. upon price on a monthly basis with 10 - The entity regularly engages third party service providers to provide office maintenance services to its customers. When the entity obtains a contract from a customer, the entity enters into a contract with one of those service providers, directing the ser vice provider to perform office maintenance services for the customer. The payment terms in the contracts with the service providers are generally aligned with the payment terms in the entity’s y the service contracts with customers. However, the entity is obliged to pa provider even if the customer fails to pay. To determine whether the entity is a principal or an agent, the entity identifies the specified good or service to be provided to the customer and assesses whether it controls that good or service b efore the good or service . is transferred to the customer A closer look at IFRS 15, the revenue recognition standard Updated October 2018 129

130 Extract from IFRS 15 (cont’d) The entity observes that the specified services to be provided to the customer are the office maintenance services for which the customer contracted, and that no other goods or services are promised to the customer. While the entity obtains a right to office maintenance services from the service provider after entering into the contract with the customer, that right is not That is, the entity retains the ability to direct transferred to the customer. the use of, and obtain substantially all the remaining benefits from, that right. For example, the entity can decide whether to direct the service provider to provide the office maintenance services for t hat customer, or for another customer, or at its own facilities. The customer does not have a right to direct the service provider to perform services that the entity has not agreed to provide. Therefore, the right to office maintenance services obtained b y the entity from the service provider is not the specified good or service in its contract with the customer. The entity concludes that it controls the specified services before they are provided to the customer. The entity obtains control of a right to o ffice maintenance services after entering into the contract with the customer but before those services are provided to the customer. The terms of the entity’s contract with the service provider give the entity the ability to direct the provide the specified services on the entity’s behalf (see service provider to paragraph B35A(b)). In addition, the entity concludes that the following indicators in paragraph B37 of IFRS 15 provide further evidence that the entity controls the office maintenance services be fore they are provided to the customer: (a) t he entity is primarily responsible for fulfilling the promise to provide office maintenance services. Although the entity has hired a service entity provider to perform the services promised to the customer, it is the itself that is responsible for ensuring that the services are performed and are acceptable to the customer (ie the entity is responsible for fulfilment of the promise in the contract, regardless of whether the entity performs - party service provider to perform engages a third the services itself or the services). (b) t he entity has discretion in setting the price for the services to the customer. The entity observes that it does not commit itself to obtain the services from aining the contract with the customer. Thus, the service provider before obt the entity has mitigated inventory risk with respect to the office maintenance services. Nonetheless, the entity concludes that it controls the office maintenance services before they are provided to the custome r on the basis of the evidence in paragraph IE238E. Thus, the entity is a principal in the transaction and recognises revenue in the amount of consideration to which it is entitled from the customer in exchange for the office maintenance services. Updated October 2018 130 A closer look at IFRS 15, the revenue recognition standard

131 The sta ndard also includes the following example of when the specified good or service is the right to obtain a service and not the underlying service itself. The entity in this example is determined to be a principal: Extract from IFRS 15 — Promise to provide goods or services (entity is a principal) Example 47 - IE243) (IFRS 15.IE239 An entity negotiates with major airlines to purchase tickets at reduced rates compared with the price of tickets sold directly by the airlines to the public. The entity agrees to bu y a specific number of tickets and must pay for those tickets regardless of whether it is able to resell them. The reduced rate paid by the entity for each ticket purchased is negotiated and agreed in advance. The entity determines the prices at which the airline tickets will be sold to its customers. The entity sells the tickets and collects the consideration from customers when the tickets are purchased. The entity also assists the customers in resolving complaints with the service provided by the airlines. However, each airline is responsible for fulfilling obligations associated with the ticket, including remedies to a customer for dissatisfaction with the service. To determine whether the entity’s performance obligation is to provide the d goods or services itself (ie the entity is a principal) or to arrange specifie for those goods or services to be provided by another party (ie the entity is an agent), the entity identifies the specified good or service to be provided to es whether it controls that good or service before the customer and assess the good or service is transferred to the customer. The entity concludes that, with each ticket that it commits itself to purchase from the airline, it obtains control of a right to fly on a specified flig ht (in the form of a ticket) that the entity then transfers to one of its customers (see paragraph B35A(a)). Consequently, the entity determines that the specified good or service to be provided to its customer is that right (to a seat on a specific flig ht) that the entity controls. The entity observes that no other goods or services are promised to the customer. The entity controls the right to each flight before it transfers that specified right to one of its customers because the entity has the abilit y to direct the use of that right by deciding whether to use the ticket to fulfil a contract with a customer and, if so, which contract it will fulfil. The entity also has the ability to obtain the remaining benefits from that right by either reselling he ticket and obtaining all of the proceeds from the sale or, alternatively, t using the ticket itself. The indicators in paragraphs B37(b) – (c) of IFRS 15 also provide relevant evidence that the entity controls each specified right (ticket) before it is tran sferred to the customer. The entity has inventory risk with respect to the ticket because the entity committed itself to obtain the ticket from the airline before obtaining a contract with a customer to purchase the ticket. This is because the entity is o bliged to pay the airline for that right regardless of whether it is able to obtain a customer to resell the ticket to or whether it can obtain a favourable price for the ticket. The entity also establishes the price that the customer wil ified ticket. l pay for the spec Thus, the entity concludes that it is a principal in the transactions with customers. The entity recognises revenue in the gross amount of consideration to which it is entitled in exchange for the tickets transferred to the customers. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 131

132 In the following example, the entity also determines that the specified good or service is the right to obtain a service and not the underlying service itself. However, the entity in this example is determined to be an agent. Extract from IFRS 15 Example 48 — Arranging for the provision of goods or services (entity is an agent) (IFRS 15.IE244 IE248) - An entity sells vouchers that entitle customers to future meals at specified restaurants. The sales price of the voucher provides the customer with a significant discount when compared with the normal selling prices of the meals (for example, a customer pays CU100 for a voucher that entitles the customer to a meal at a restaurant that would otherwise cost CU200). The entity does not purchase or commit i e tself to purchase vouchers in advanc of the sale of a voucher to a customer; instead, it purchases vouchers only as they are requested by the customers. The entity sells the vouchers through its website and the vouchers are non - refundable. The entity and the restaurants jointly determine the prices at which the vouchers will be sold to customers. Under the terms of its contracts with the restaurants, the entity is entitled to 30 per cent of the voucher price when it sells the voucher. The entity also as sists the customers in resolving complaints about the meals and has a buyer satisfaction programme. However, the restaurant is responsible for fulfilling obligations associated with the voucher, including service. remedies to a customer for dissatisfaction with the To determine whether the entity is a principal or an agent, the entity identifies the specified good or service to be provided to the customer and assess whether it controls the specified good or service before that good or service is transferred to the customer. A customer obtains a voucher for the restaurant that it selects. The entity does not engage the restaurants to provide meals to customers on the entity’s behalf as described in the indicator in paragraph B37(a) of IFRS 15. Therefore, the entity observes that the specified good or service to be provided to the customer is the right to a meal (in the form of a voucher) at a specified restaurant or restaurants, which the customer purchases and then can use itself or transfer to another perso n. The entity also observes that no other goods or services (other than the vouchers) are promised to the customers. The entity concludes that it does not control the voucher (right to a meal) at any time. In reaching this conclusion, the entity principally considers the following: (a) t he vouchers are created only at the time that they are transferred to the customers and , thus, do not exist before that transfer. Therefore, the entity does not at any time have the ability to direct the use of the vouchers, or obtain substantially all of the remaining benefits from the vouchers, before they are transferred to customers. entity neither purchases, nor commits itself to purchase, vouchers e h t (b) before they are sold to customers. The entity also has no responsibility to accept any returned vouchers. Therefore, the entity does not have inventory risk with respect to the vouchers as described in the indicator in paragraph B37(b) of IFRS 15. Updated October 2018 132 A closer look at IFRS 15, the revenue recognition standard

133 Extract from IFRS 15 (cont’d) Thus, the entity concludes that it is an agent with respect to the vouchers. The entity recognises revenue in the net amount of consideration to which the entity will be entitled in exchange for arranging for the restaurants to provide vouchers to customers for the restaurants’ meals, which is the cent commission it is entitled to upon the sale of each voucher. 30 per Frequently asked questions Question 4 - 8 : How would entities determine the presentation of amounts billed to customers (e.g., shipping and handling, expenses or cost reimbursements and taxes) under the standards (i.e., as revenue or as a – Agenda pa per no. 2] reduction of costs)? [TRG meeting 18 July 2014 TRG members generally agreed that the standard is clear that any amounts not collected on behalf of third parties would be included in the transaction price (i.e., revenue). As discussed in section 5, IFRS 15.47 says that “the transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes)”. unts were incurred by the Therefore, if the amo are entity in fulfilling its performance obligations, the amounts included in the transaction price and recorded as revenue. Shipping and handling The appropriate presentation of amounts billed to customers for shipping and handling activities would depend on whether they entity is a principal or an agent in the shipping arrangement (see Question 10 - 7 in section 10.2 for further discussion on presentation of shipping and handling costs incurred by the entity ) . Expense or cost reimbursements Many service providers routinely incur incidental expenses, commonly of pocket expenses, in the course of conducting their referred to as ‘ out - ’ - normal operations. Those expenses often include, but are not limited to, airfare, other tra vel - related costs ( such as car rentals and hotel accommodation) and telecommunications charges. The entity (i.e., the service provider) and the customer may agree that the customer will reimburse the entity for the actual amount of such expenses incurred. Alternatively, the parties may negotiate a single fixed fee that is intended to compensate the service provider for both professional services rendered and out - of - pocket expenses incurred. pocket expenses are O ut - of - lfilling its often costs incurred by an entity in fu performance obligation(s) (i.e., the out - - pocket expenses are fulfilment of costs) and do not transfer a good or service to the customer. In these situations, reimbursement for such costs generally should be included in the entity’s estimate of the transaction price and recognised as revenue when (or as ) the performance obligation(s) is ( are ) satisfied , even if the entity is reimbursed at ‘cost’ (i.e., at zero margin) . Alternatively, if an entity concludes that the costs transfer a good or service to the customer, it should do agent when determining application guidance consider the principal - versus - be need to whether reimbursement amounts received from its customer recorded on a gross or net basis. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 133

134 Frequently asked questi ons (cont’d) t may be appropriate to recognis e the reimbursement as In some cases i expense is incurred. That is, an entity may revenue when the applicable not have to estimate out of - pocket expenses in its determination of the - transaction price at contract inception. This was discussed in a US Private Company Council meeting under US GAAP. The FASB staff observed in the 148 ations in which this would be the case: related staff paper the following situ The entity is an agent as it relates to the specified good or service • identified (see section 4.4). That is, in cases in which the entity is an agent and the reimbursement is equal to the cost, the net effect on rev enue would be zero and , therefore , no estimation would be required. • The variable consideration is constrained (see section 5.2.3). That is, if - - a portion of the transaction price related to reimbursements of out of pocket expenses is constrained, an entity would not include an estimate in the transaction price for that amount until it becomes highly probable that a significant revenue reversal will not occur, which may be when the underlying out of - pocket expenses are incurred in some cases. For - example, a n entity may not be able to make reliable estimates of expenses and the related reimbursements that will not be subject to a significant revenue reversal due to a lack of historical evidence. The variable consideration relates specifically to a performance obligation or a distinct good or service in a series and the entity meets the variable consideration exception (see section 6.3). • (see The entity qualifies to apply the ‘ right to invoice ’ practical expedient section 7.1.4.A ). The entity applies a costs incurred measure of progress when • ing recognis revenue for over - time performance obligations (see section 7.1.4). That is, if an entity selects a method, the timing of the cost s costs incurred being incurred and the revenue recogn ition associated with those costs would align. Taxes or other assessments Several TRG members noted that this would require entities to evaluate taxes collected in all jurisdictions in which they operate to determine whether a tax is levied on the entity o r the customer. TRG members generally agreed that an entity would apply the principal versus agent application guidance when it is not clear whether the amounts are collected on behalf of third parties. This could result in amounts billed to a customer bei ng recorded as an offset to costs incurred (i.e., on a net basis), even when the amounts are not collected on behalf of third parties. Question 4 - 9 : How should an entity allocate the transaction price in a contract with multiple performance obligations in which the entity acts as both a principal and an agent? See response to Question 6 - 7 in section 6.2. 148 , FASB staff Private Company Council Memo, Reimbursement of Out - of - Pocket Expenses dated 26 June 2018 . FASB website . Refer to the Updated October 2018 134 A closer look at IFRS 15, the revenue recognition standard

135 FASB differences The FASB’s standard allows an entity to make an accounting policy choice to present revenue net of certain types of taxes collected from a customer added and some excise taxes). The FASB (including sales, use, value - included this policy choice to address a concern expressed by stakeholders e requirements under US GAAP. IFRS 15 in the US as to the operability of th does not provide a similar accounting policy choice in IFRS 15 for the following reasons: it would reduce comparability; the requirements in 149 15 are consistent with those in legacy IFRS; IFRS and it would create 150 - step model. an ex Since entities do not have a similar ception to the five accounting policy choice under IFRS, differences could arise between IFRS and US GAAP. Another difference relates to determining the transaction price when an entity is the principal, b ut is unable to determine the ultimate price charged to the customer. In the Basis for Conclusions on its May 2016 amendments, the FASB stated that, if uncertainty related to the transaction price is not ultimately expected to be resolved, it would not me et the definition of variable consideration and, therefore, should not be included in the 151 transaction price. Stakeholders had raised a question about how an entity that is a principal would estimate the amount of revenue to recognise if - it were not aware of the amounts being charged to end customers by an intermediary that is an agent. The IASB did not specifically consider how the transaction price requirements would be applied in these situations (i.e., when an entity that is a princip al does not know and expects not to know the price charged to its customer by an agent), but concluded in the Basis for Conclusions that an entity that is a principal would generally be able to apply judgement and determine the consideration to which it is 152 entitled using all information available to it. Accordingly, we believe that it is possible that IFRS and US GAAP entities will reach different conclusions on estimating the gross transaction price in these situations. 4.5 Consignment arrangements Th e standard provides specific application guidance for a promise to deliver goods on a consignment basis to other parties. See s ection 7.4. 4.6 Customer options for additional goods or services (updated October 2018) option to acquire additional goods or Many sales contracts give customers the or services may be priced at a discount or services. These additional goods may even be free of charge. Options to acquire additional goods or services at a discount can come in many forms, including sales incentives , volume - tiered pricing structures, frequent flyer points) or customer award credits (e.g., contract renewal options (e.g., waiver of certain fees, reduced future rates). As discussed in section 5.8, the existence of a non - refundable up front fee may or indic ate that the contract includes a renewal option for future goods services at a reduced price (e.g., if the customer renews the contract without the front fee) A payment of an additional up evaluate . n entity would need to the renewal option to determine whether it is a material right. 149 IAS 18.8. 150 IFRS 15.BC188D. 151 FASB ASU 2016 - 08, Revenue from Contracts with Customers (Topic 606): Principal versus . Agent Considerations (March 2016), paragraph BC38 152 IFRS 15.BC385Z. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 135

136 W hen an entity grants a customer the option to acquire additional goods or is only a separate performance obligation if it provides services, that option a material right to the customer that the customer would not receive without entering into the contract (e.g., a discount that exceeds the range of discounts typically given for those goods or services to that class of customer in that geographical area or Refer to Question 4 - 1 4 below for further market). If the option provides a discussion on the evaluation of class of customer. the customer, the customer has, in effect, paid in advance for material right to future goods or services. As such, the entity re cognises revenue when those or services are transferred or when the option expires. In the Basis future goods for Conclusions, the IASB indicated that the purpose of this requirement is to identify and account for options that customers are paying 153 ten implicitly) as part of the current transaction. for (of The Board did not provide any bright lines as to what constitutes a ’material’ an option to purchase additional right. However, the standard requires that goods or services at their stand - alone selling prices does not provide a material right and , instead , is a marketing offer. This is the case even if the customer has obtained the option only as a result of entering into a previous contract. in the future at the However, an option to purchase additional goods or services current stand - alone selling price could be a material right if prices are highly if a renewal option at to significantly increase . This could also be the case likely od of time the current stand - alone selling price is offered for an extended peri - to highly likely significantly and the stand alone selling price for the product is increase of the contract . This is , depending on the facts and circumstances because the customer is being offered a discount on future goods or services to what others will have to pay in the future as a result of entering compared The standard states that this is the case even if the into the previous contract. option can only be exercised because the customer entered into the earlier transaction. An entity that has made a marketing offer accounts for it in accordance with IFRS 15 only when the customer exercises the option to 154 purchase the additional goods or services. What’s chang from legacy IFRS? ed Legacy IFRS d id not provide application guidance on how to distinguish between it address how to an option and a marketing offer (i.e., as an expense). Nor d id account for options that provide a material right. As a result, some entities or such options as marketing offers. IFRS 15’s may have effectively accounted f requirements on the amount of the transaction price to be allocated to the option differ significantly from previous practice due to the lack of guidance in legacy IFRS (see s ection 6.1.5). How we see it Sign ificant judgement may be required to determine whether a customer option represents a material right. This determination is important because it affect s the accounting and disclosures for the contract at inception and throughout the life of the contract. The standard includes the following example to illustrate the determination of a discussion whether an option represents a material right ( see s ection 6.1.5 for of the measurement of options that are separate performance obligations): 153 IFRS 15.BC386. 154 IFRS 15.B41. Updated October 2018 136 A closer look at IFRS 15, the revenue recognition standard

137 Extract from IFRS 15 — Option that provides the customer with a material right Example 49 (discount voucher) (IFRS 15.IE250 - IE253) An entity enters into a contract for the sale of Product A for CU100. As part discount voucher of the contract, the entity gives the customer a 40 per cent for any future purchases up to CU100 in the next 30 days. The entity intends to offer a 10 per cent discount on all sales during the next 30 days as part of a seasonal promotion. The 10 per cent discount cannot be used in addition to the 4 0 per cent discount voucher. Because all customers will receive a 10 per cent discount on purchases during the next 30 days, the only discount that provides the customer with a material right is the discount that is incremental to that 10 per cent (ie th e additional 30 per cent discount). The entity accounts for the promise to provide the incremental discount as a performance obligation in the contract for the sale of Product A. - alone selling price of the discount voucher in To estimate the stand ce with paragraph B42 of IFRS 15, the entity estimates an 80 per accordan cent likelihood that a customer will redeem the voucher and that a customer will, on average, purchase CU50 of additional products. Consequently, the entity’s estimated stand - alone selling p rice of the discount voucher is CU12 (CU50 average purchase price of additional products × 30 per cent incremental discount × 80 per cent likelihood of exercising the option). The stand - alone selling prices of Product A and the discount voucher and the r esulting allocation of the CU100 transaction price are as follows: Stand Performance alone - selling price obligations CU Product A 100 Discount voucher 12 Total 112 Allocated transaction price 89 (CU100 ÷ CU112 × CU100) Product A Discount voucher 11 (CU12 ÷ CU112 × CU100) Total 100 The entity allocates CU89 to Product A and recognises revenue for Product A when control transfers. The entity allocates CU11 to the discount voucher customer redeems it for and recognises revenue for the voucher when the goods or services or when it expires. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 137

138 Frequently asked questions 10 - : Would entities consider only the current transaction or Question 4 would they consider past and future transactions with the same customer when determining whether an option for additional goods or services provides the customer with a material right? [TRG meeting 31 October – Agenda paper no. 6] 2014 all relevant TRG members generally agreed that entities should consider current, past and future transactions), transactions with a customer (i.e., including those that provide accumulating incentives, such as loyalty programmes, when determining whether an option represents a material right. That is, the evaluation is not solely performed in relation to the current transaction. - 1 1 : Is the material right evaluation solely a quantitative Question 4 evaluation or does the evaluation also consider qualitative factors? [TRG – Agenda paper no. 6] meeting 31 October 2014 TRG members generally agreed that the evaluation should consider both quantitative and qualitative factors (e.g., what a new customer would pay for the same service, the availability and pricing of competitors’ service alternatives, whether the average customer life indicates that the fee provides an incentive for customers to remain beyond the stated contract term , whether the right accumulates ). This is beca use a customer’s perspective on what constitutes a ‘material right’ may consider qualitative This is consistent with the notion that when identifying promised factors. goods or services in Step 2, an entity considers reasonable expectations of the customer that the entity will transfer a good or service to it. : How would an entity distinguish between a contract that Question 4 - 1 2 or contains an option to purchase additional goods services and a contract that includes variable consideration ( see ection 5.2) based on a variable s - based fee)? [TRG meeting 9 November 2015 quantity (e.g., a usage – Agenda paper no. 48] Entities have found it challenging to distinguish between a contract that includes customer options to purchase additional goods or services and one that includes variable consideration based on a variable quantity (e.g., a because, under both types of contracts, the ultimate - based fee) . This is usage quantity of goods or services to be transferred to the customer is often unknown at contact inception. TRG members generally agreed that this determination requires judgement and consideration of the facts and on this circumstances. They also generally agreed that the TRG agenda paper question provides a framework that entities to make this determination. help s the accounting for s This determination is important because it affect throughout the life of the contract, as well the contract at inception and as disclosures. If an entity concludes that a customer option for additional goods or services provides a material right, the option itself is deemed to be a performance obligation in the contract, but the underlying goods or services are not accounted for until the option is exercised (as discussed below in Question 4 - 1 3 ). As a result, the entity is required to allocate a portion of the transaction price to the material right at contract inception and to recognise that revenue when or as the option is exercised or the option expires. If an entity, instead, concludes that an option for additional goods or services is not a material right, there is no accounting for the option and no accounting for the underlying optional goods or services until those subsequent purchases occu r. Updated October 2018 138 A closer look at IFRS 15, the revenue recognition standard

139 Frequently asked questions (cont’d) However, if the contract includes variable consideration (rather than a s to estimate at contract inception the variable customer option), an entity ha consideration expected over the life of the contract and update that estimate consideration) each reporting period (subject to the constraint on variable s ection 5.2). There are also more disclosures required for variable (see the requirement to disclose the remaining transaction consideration (e.g., ied performance obligations) (see s ection 10.4.1) than for price for unsatisf options that are not determined to be material rights. The TRG agenda paper explained that the first step (in determining whether a contract involving variable quantities of goods or services shou ld be accounted for as a contract containing customer options or variable consideration) is for the entity to determine the nature of its promise in providing goods or services to the customer and the rights and obligations of each party. in which the variable quantity of goods or services results in In a contract variable consideration, the nature of the entity’s promise is to transfer to the customer an overall service. In providing this overall service, an entity may perform individual tasks or activities. At contract inception, the entity is presently oblig ed by the terms and conditions of the contract to transfer all promised goods or services provided under the contract and the customer is oblig ed to pay for those promised goods or services. This is because the customer entered into a co to transfer those ntract that oblig es the entity goods or services. The customer’s subsequent actions to utilise the service , affect the measurement of revenue (in the form of variable consideration) oblig e but do not the entity to provide additional distinct goods or services beyond tho se promised in the contract . For example, consider a contract between a transaction processor and a customer in which the processor will process all of the customer’s transactio ns in exchange for a fee paid for each transaction processed. The ultimate quantity of transactions that will be processed is not known. The nature of the entity’s promise is to provide the customer with continuous access to the processing platform so th at submitted transactions are processed. By entering into the contract, the customer has made a purchasing decision that obligates the entity to provide continuous access to the transaction processing platform. The consideration paid by the ts from events (i.e., additional transactions being submitted customer resul for processing to the processor) that occur after (or as) the entity transfers the payment processing service. The customer’s actions do not obligate the processor to provide additional distin ct goods or services because the processor is already obligated (starting at contract inception) to process all transactions submitted to it. Another example described in the TRG agenda paper of contracts that may include variable consideration was related to certain IT outsourcing contracts. Under this type of contract (similar to the transa ction processing contract, provides continuous delivery of a service over discussed above), the entity the contract term and the amount of service provided is variable. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 139

140 (cont’d) Frequently asked questions Example of variable consideration An entity enters into a 10 - year IT outsourcing arrangement with a customer in which it provides continuous delivery of outsourced activities over the contract term. The entity provides server capacity, manages the IT help desk. The total monthly customer’s software portfolio and runs an invoice is calculated based on different units consumed for the respective activities. For example, the billings might be based on millions of instructions per second of computing power, the number of software applications u sed or the number of employees supported. The price per unit differs for each type of activity. At contract inception, it is unknown how many outsourced activities the entity will perform for the customer throughout the life of the contract. The question that arises is whether the customer makes optional purchases when it sends activities to the entity to be performed or whether its use of the service affects the measurement of revenue (in the form of variable consideration). The conclusion in the TRG agen da paper was that this contract is likely to contain variable consideration because of the nature of the entity’s promise. T he customer is paying for the entity to stand ready to perform in an outsourcing capacity on any given day. The customer does not make a separate purchasing decision each time it sends a unit for processing. decision when it entered into Instead, the customer made its purchasing the outsourcing contract with the entity. T herefore, t he customer’s actions oblige the entity to provide any additional the service also do not to use distinct goods or services. when an entity provides a customer option, the nature of In contrast, its promise is to provide the quantity of goods or services specified in the contract , if any, and a right for t he customer to choose the amount of additional distinct goods or services the customer will purchase . That is, additional distinct goods or services any t to provide he entity is not oblig ed until the customer exercises the option. The customer has a contr actual right that allows it to choose the amount of additional distinct goods or services to purchase, but the customer has to make a separate purchasing decision to obtain those additional distinct goods or services. Prior to the customer’s exercise of that right, the entity is not obligated to provide (nor does it have a right to consideration for transferring) those goods or services. The TRG agenda paper included the following example of a contract that includes a customer option (rather than variabl e consideration): Entity B Y in return for enters into a contract to provide 100 widgets to Customer consideration of CU10 per widget. Each widget is a distinct good transferred at a point in time. The contract also gives Customer Y the right to purchase alone selling price of CU10 per widget. a - dditional widgets at the stand ased by Customer Y is variable. Therefore, the quantity that may be purch Updated October 2018 140 A closer look at IFRS 15, the revenue recognition standard

141 Frequently asked questions (cont’d) The conclusion in the TRG agenda paper was that, while the quantity of widgets that may be purchased is variable, the transaction price for the existing contract is fixed at CU1,000 [100 widgets x CU10/widget]. That is, the dgets specified transaction price only includes the consideration for the 100 wi in the contract and the customer’s decision to purchase additional widgets is an option. While Entity B may be required to deliver additional widgets in the future, Entity B is not legally obligated to provide the additional widgets until Customer Y exercises the option. In this example, the option is accounted for as a separate contract because there is no material right, since the pricing of the option is at the stand - alone selling price of the widgets. The TRG agenda paper also include d the following example of a contract in which the variable quantity of goods or services includes a customer option : Example of customer option year master supply arrangement in which A supplier enters into a five - the supplier is obligated to produce and sell parts to a customer at the customer’s request. That is, the supplier is not obligated to transfer any parts until the customer submits a purchase order. In addition, the customer is not obligated to purchase any parts; however, it is highly likely it will do so because the part is required to manufacture the customer’s product and it is not practical to obtain parts from multiple suppliers. Each part is determined to a distinct good that transfers to the customer at a point in time. The conclusion in the TRG agenda paper was that the nature of the promise in this example is the delivery of parts (and not a service of standing ready to produce and sell parts). That is, the contract provides the customer with a al distinct goods (i.e., it provides a right to choose the quantity of addition customer option), rather than a right to use the services for which control to the customer has (or is currently being) transferred (such as in the transaction processor example above). Similarly, the supplier is not obligated to transfer any parts until the customer submits the purchase order (another important factor in distinguishing a customer option from supplier variable consideration). In contrast, in the other fact patterns , the is obligated to make the promise d services available to the customer without any additional decisions made by the customer. The TRG agenda paper contrasted this example with other contracts that - ready obligation (e.g., a customer’s use of a health may include a stand tomer submits a purchase order under the master supply club). When the cus arrangement, it is contracting for a specific number of distinct goods, which creates new performance obligations for the supplier. In contrast, a customer using services in a health club is using serv ices that the health club is already obligated to provide under the present contract. That is, there are no new obligations arising from the customer’s usage. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 141

142 Frequently asked questions (cont’d) The TRG agenda paper also included the following example of a contract in which the variable quantity of goods or services results in variable consideration : Example of v ariable consideration Entity A enters into a contract to provide equipment to Customer X. The equipment is a single performance obligation transferred at a point in time. Entity A charges Customer X based on its usage of the equipment at a fixed rate per unit of consumption. The contract has no minimum payment guarantees. Customer X is not contractually obligated to use the equipment. However , Entity A is contractually obligated to transfer the equipment to Customer X. The conclusion in the TRG agenda paper was that the usage of the equipment by Customer X is a variable quantity that affects the amount of consideration owed to Entity A. It do es not affect Entity A’s performance obligation, which is to transfer the piece of equipment. That is, Entity A has performed by transferring the distinct good. Customer X’s actions, which result in payment to Entity A, occur after the transferred and do not require Entity A to provide equipment has been additional goods or services. : When, if ever, would an entity consider the goods or Question 4 - 3 1 services underlying a customer option as a separate performance obligation? [TRG meeting 9 November 2015 Agenda paper no. 48] – TRG members generally agreed that, even if an entity believes that it is virtually certain that a customer will exercise its option for additional goods or services, it would not identify the additional goods or services underlying th e option as promised goods or services (or performance obligations) if there are no contractual penalties. Only the option would be assessed to determine whether it represents a material right to be accounted for as a onsideration that would be received in performance obligation. As a result, c return for optional goods or services is not included in the transaction price at contract inception.The TRG agenda paper included the following example of a contract in which it is virtually certain that a customer will exercise its option for additional goods or services: Example of customer option with no contractual penalties An entity sells equipment and consumables, both of which are determined to be distinct goods that are recognised at a point in time. The stand - alone selling price of the equipment and each consumable is CU10,000 and CU100, respectively. The equipment costs CU8,000 and each consumable costs CU60. The entity sells the equipment for CU6,000 (i.e., at a 40% alone selling price) with a customer option to - discount on its stand purchase each consumable for CU100 (i.e., equal to its stand alone selling - price). Th ere are no contractual minimums, but the entity estimates the customer will purchase 200 parts over the next two years. This is an exclusive contract in which the customer cannot purchase the consumables from any other vendors during the contract term. Updated October 2018 142 A closer look at IFRS 15, the revenue recognition standard

143 Frequently asked questions (cont’d) Example of customer option with no contractual penalties (cont’d) TRG members generally agreed that the consumables underlying each option would not be considered part of the contract. Furthermore, the the stand - option does not represent a material right because it is priced at even though the alone selling price for the consumable. This is the case customer is compelled to exercise its option for the consumables because the equipment cannot funct ion without the consumables and the contract includes an exclusivity clause that requires the customer to acquire the consumables only from the entity. Accordingly, the transaction price is CU6,000 and it is entirely attributable to the equipment. This wo uld result in a loss for the entity of CU2,000 when it transfers control of the equipment to the customer. However, contractual minimums may represent fixed consideration in a contract, even if the contract also contains optional purchases. For example, a n MSA may set minimum purchase quantit ies that the entity is obliged to provide, but any quantities above the minimum may require the customer to make a separate purchasing decision (i.e., exercise a customer option). termination fees, monetary penalties If contractual penalties exist (e.g., ) be appropriate to for not meeting contractual minimums, it may assessed include some or all of the goods or services underlying customer options as part of the contract at inception. This is because the penalty effectively creates a minimum purchase obligation for the goods or services that would be purchased if the penalty were enforced. Example of customer option with contractual penalties Consider the same facts as in the example above, except that the customer will incur a penalty if it does not purchase at least 200 consumables. That is, the customer will be required to repay some or all of the CU4,000 discount provided on the equipment. Per the contract terms, the penalty decreases as each consumable is purchased at a rate of CU20 per consumable. The conclusion in the TRG agenda paper was that the penalty is substantive and it effectively creates a minimum purchase obligation. As a result, the entity conclude s that the minimum number of consumables req uired to avoid the penalty would be evidence of enforceable rights and obligations. The entity would then calculate the transaction price as CU26,000 [(200 consumables x CU100/consumable) + CU6,000 (the selling price of the equipment)]. Furthermore, the co nclusion in the TRG agenda paper was that, if the customer failed to purchase for the resulting penalty as a s 200 consumables, the entity account contract modification. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 143

144 Frequently asked questions (cont’d) - 4 : How should an entity consider the class of customer when Question 4 1 evaluating whether a customer option is a material right? [18 April 2016 FASB TRG meeting; agenda paper no. 54] FASB TRG members expressed diverse views on how an entity should ’ class of customer ’ when determining whethe r a customer option consider to acquire additional goods or services represents a material right. However, they generally agree d that in making this evaluation, an entity should first determine whether the customer option exists independently of the existing act. That is, would the entity offer the same pricing to a similar contr customer independent of a prior contract with the entity? If the pricing is independent, the option is considered a marketing offer and there is no material right. FASB TRG members also g enerally agreed that the determination is likely to require an entity to exercise significant judg e ment and conside r all facts and circumstances. As discussed above, IFRS 15.B40 states that when an entity grants a customer the option to acquire additional goods or services, that option is a separate performance obligation if it provides a material right that the customer would not receive without entering into the contract (e.g ., a discount that exceeds the range of discounts typically given for those goods , or services to that class of customer in that region or market). Further more IFRS 15.B41 states that an option to purchase additional goods or services at their stand - alone selling prices does not provide a material right and instead the TRG agenda paper that is a marketing offer. The FASB staff noted in these requirements are intended to make clear that a customer option to acquire additional goods or services would not give rise to a material right if a customer could execute a separate contract to obtain the goods or services at the same price. That is, customer options that would exist independently of an existing contract with a customer do no t constitute performance ligations in that existing contract. ob The TRG agenda paper provided several examples of the FASB staff’s views on this topic, including the following: Example of class of customer evaluation Retailer owns and operates several electronic stores and currentl y - inch television with a coupon for provides customers who purchase a 50 50% off the purchase of a stereo system. The coupon must be redeemed at one of Retailer’s stores and is valid for one year. Retailer has never offered a discount of this magnitude to a customer that does not purchase a television (or another item of similar value). - inch television from Retailer. At the time Customer A purchases a 50 of purchase, Customer A receives a coupon for 50% off a stereo system. In evaluating whether the 50% di scount provided to Customer A exists independently of its existing contract to purchase a television, Retailer needs to compare the discount offered to Customer A (50%) with the discount typically offered to other customers independent of a prior contract (purchase) with Retailer. For customers that do not purchase a inch television, the only promotion Retailer is running on the stereo - 50 system is offering a 5% off coupon to all customers walking into the store. compare the discount offered to It would not be appropriate for Retailer to Updated October 2018 144 A closer look at IFRS 15, the revenue recognition standard

145 Frequently asked questions (cont’d) Example of class of customer evaluation (cont’d) Customer A with a discount offered to another customer that also purchased a 50 - inch television. This is because the objective of the requirements in paragraphs B40 through B41 is to determine whether a customer option exists independently of an existing c ontract with a customer. Retailer determines that the discount offered to Customer A is not comparable to the discount typically offered to customers without a prior contract (purchase). Rather, Customer A is receiving an incremental d not have received had it not entered into a contract discount that it woul to purchase a 50 inch television. The incremental discount provided to - Customer A represents a material right. Question 4 - 1 5 : Should volume rebates and/or discounts on goods or services be accounted f or as variable consideration or as customer options to acquire additional goods or services at a discount? It depend s on whether rebate or discount programme is applied retrospectively or prospectively. prospectively, we believe Generally, if a volume rebate or discount is applied the rebate or discount would be accounted for as a customer option (not variable consideration). This is because the consideration for the goods or services in the present contract is not contingent upon or affected by any future purchases. Rather, the discounts available from the rebate programme affect the price of future pu rchases. Entities need to evaluate whether the volume rebate or discount provides the customer with an option to purchase goods or services in the future at a discount that represents a material right (and is, therefore, accounted for as a performance obli gation) (see Question 4 - 1 6 below). However, we believe a volume rebate or discount that is applied is retrospectively accounted for as variable consideration (see s ection 5.2). This is because the final price of each good or service sold depends upon the ustomer’s total purchases that are subject to the rebate programme. That is, c the consideration is contingent upon the occurrence or non - occurrence of future events. This view is consistent with Example 24 in the standard (which is extracted in full in s ect ion 5.2.1). Entities should keep in mind that they need to evaluate whether contract terms, other than those specific to the rebate or discount programme, create if the to be separately evaluated (e.g., variable consideration that need s e rebate programme are also sold with a right of return). goods subject to th A closer look at IFRS 15, the revenue recognition standard Updated October 2018 145

146 Frequently asked questions (cont’d) Question 4 - 1 6 : How should an entity consider whether prospective volume discounts determined to be customer options are material rights? TRG meeting 18 April 2016 - Agenda paper no. 54] [FASB similar FASB TRG members generally agreed that in making this evaluation, on above in Question 4 - 1 5 to the discussi an entity would first evaluate , whether the option exists independently of the existing contract. That is, would the entity offer the same pricing to a similar high volume customer - independent of a prior contract with the entity? If yes, it indicates that the volume discount is not a material right, as it is not incremental to the discount - volume customer. If the entity typically a similar high typically offered to charges a higher price to a similar customer, it may indicate that the volume discount is a material right as the discount is incremental. The TRG agenda paper included the following example: of volume discounts Example Entity enters into a long - term master supply arrangement with Customer A to provide an unspecified volume of non - customised parts. The price of the parts in subsequent years is dependent upon Customer A’s purchases in the current year. That is, Entity charges Customer A CU1.00 per part in year one and if Customer A purchases more than 100,000 parts, the year . two price will be CU0.90 per part whether the contract between Entity and Customer A ing When determin includes a material ri ght, Entity first evaluates whether the option provided to Customer A exists independently of the existing contract. To do this, Entity compare s the discount offered to Customer A with the discount typically offered to a similar high - volume customer that r eceives a discount independent of a prior contract with Entity. Such a similar customer could be Customer B who places a single order with Entity for 105,000 parts. Comparing the price offered to Customer A in year two with offers to other customers that a lso receive pricing that is contingent on prior purchases would not help Entity determine whether Customer A would have been offered the year two price had it not entered into the original contract. is The evaluation of when volume rebates result in material right s likely to require significant judgement. - 1 7 Question 4 : How would an entity account for the exercise of a material right? That is, would an entity account for it as: a contract modification, a continuation of the existing contract or variable c onsideration? [TRG meeting 30 March 2015 – Agenda paper no. 32] TRG members generally agreed that it is reasonable for an entity to account for the exercise of a material right as either a contract modification or as a (i.e., a change in the transaction price). continuation of the existing contract not appropriate to account for is TRG members also generally agreed that it ight as variable consideration. the exercise of a material r Updated October 2018 146 A closer look at IFRS 15, the revenue recognition standard

147 Frequently asked questions (cont’d) that the standard could be Although TRG members generally agreed interpreted to allow either approach, many TRG members favoured treating the exercise of a material right as a continuation of the existing contract because the customer decided to purchase additional goods or services that were contemplated in the original contract (and not as part of a separate, subsequent negotiation). Under this approach, if a customer exercises a material right, an entity would update the transaction price of the contract h the entity expects to be entitled as to include any consideration to whic a result of the exercise, in accordance with the requirements for changes - 90 (see in the transaction price included in IFRS 15.87 ection 6.5). s Under these requirements, changes in the total transaction price are g enerally allocated to the separate performance obligations on the same basis as the initial allocation. However, IFRS 15.89 requires an entity to allocate a change in the transaction price entirely to one or more, but not all, e criteria of IFRS 15.85 are met. These criteria performance obligations if th s ection 6.3) are that the additional consideration (discussed further in specifically relates to the entity’s efforts to satisfy the performance obligation(s) and that allocating the additional consideration entirely to one or more, but not all, performance obligation(s) is consistent with the standard’s allocation objective (see section 6). The additional consideration received for the exercise of the option is likely to meet the criteria to be allocated di rectly to the performance obligation(s) underlying the material right. Revenue would be recognised when (or as) the performance obligation(s) is satisfied. (are) The TRG agenda paper included the following example: Example of the exercise of a material right under the requirements for changes in the transaction price Entity enters into a contract with Customer to provide two years of Service A for CU100 and includes an option for Customer to purchase two years of Service B for CU300. The stand - alone sel ling prices of Services A and B are CU100 and CU400, respectively. Entity concludes that the option represents a material right and its estimate of the stand - alone selling price of the option is CU33. Entity allocates the CU100 transaction price to each pe rformance obligation as follows: Stand - Transaction alone selling price % Allocation Price Service A CU100 75% CU75 Option CU33 25% CU25 100% CU100 Totals CU100 CU133 A closer look at IFRS 15, the revenue recognition standard Updated October 2018 147

148 Frequently asked questions (cont’d) Example of the e xercise of a material right under the requirements for changes in the transaction price (cont’d) Upon executing the contract, Customer pays CU100 and Entity begins transferring Service A to Customer. The consideration of CU75 that is A is recognised over the two allocated to Service year service period. The - consideration of CU25 that is allocated to the option is deferred until Service B is transferred to the customer or the option expires. Six months after executing the contract, Customer exercises the op tion to purchase two years of Service B for CU300. Under this approach, the consideration of CU300 related to Service B is added to the amount previously allocated to the option to purchase Service B (i.e., CU300 + CU25 = CU325). This is recognised as reve nue over the two year period in which Service B is - transferred. Entity is able to allocate the additional consideration received for the exercise of the option to Service B because it specifically relates to Entity’s efforts to satisfy the performance obli gation and the allocation in this manner is consistent with the standard’s allocation objective. TRG members who favoured the contract modification approach generally did so because the exercise of a material right also meets the definition of a contrac t modification in the standard (i.e., a change in the scope and/or price of a contract). Under this approach, an entity follow s the contract modification requirements in IFRS 15.18 21 (see - s ection 3.4). Since more than one approach would be acceptable, TR G members generally s to consider which approach is most appropriate, agreed that an entity need based on the facts and circumstances, and consistently apply that approach to similar contracts. - 1 8 Question 4 omer option : Is an entity required to evaluate whether a cust that provides a material right includes a significant financing component? If so, how would entities perform this evaluation? [TRG meeting 30 March 2015 – Agenda paper no.32] TRG members generally agreed that an entity ha s to evaluate whether a material right includes a significant financing component (see ection 5.5) s in the same way that it evaluate s any other performance obligation. This evaluation require s judgement and consideration of the facts and circumstances. On this question, the TRG agenda paper discussed a factor that may be determinative in this evaluation. IFRS 15.62(a) indicates that if a customer provides advance payment for a good or service, but the customer can choose when the good or service is trans ferred, no significant financing component exists. As a result, if the customer can choose when to exercise that likely be a significant financing component. there will the option, it is un Updated October 2018 148 A closer look at IFRS 15, the revenue recognition standard

149 Frequently asked questions (cont’d) 1 9: Question 4 revenue be recognised for customer options for - How should additional goods or services that represent a material right but do not have an expiration date (i.e., can an entity recognise breakage for these options)? .B40 states that an Stakeholders have asked this question because IFRS 15 entity should recognise revenue allocated to options that are material rights when the future goods or services resulting from the option are transferred or when the option expires. However, in some cases, options may be ot have an expiration date. For example, loyalty points perpetual and n likely provide a material right to a customer and, sometimes, these points s do not expire. We believe an entity may apply the requirement in IFRS 15 on customers’ unexercised rights (or breakage) which are discussed in , section 7.9 (i.e., IFRS 15.B44 - B47). That is, we believe it is appropriate for revenue allocated to a customer option that does not expire to be recognised at the earlier of when the future goods or services, resulting from the optio n, are transferred or, if the goods or services are not transferred, when the likelihood of the customer exercising the option becomes remote. 4.7 Sale of products with a right of return An entity may provide its customers with a right to return a transferred product. A right of return may be contractual, an implicit right that exists due to the entity’s customary business practice or a combination of both (e.g., an entity has a stated re turn period, but generally accepts returns over a longer period). A customer exercising its right to return a product may receive a full or partial refund, a credit that can be applied to amounts owed, a different product in exchange or any combination of these items. Offering a right of return in a sales agreement obliges the selling entity to stand ready to accept any returned product. IFRS 15.B22 states that such an obligation does not represent a performance obligation. Instead, the Board concluded th at an entity makes an uncertain number of sales when it provides goods with a return right. That is, until the right of return expires, the entity is not certain how many sales will fail. Therefore, an entity does not recognise revenue for sales that are expected to fail as a result of the customer exercising 155 its right to return the goods. Instead, the potential for customer returns needs to be considered when an entity estimates the transaction price because potential returns are a component of variable consideration. This concept is discussed further in s ection 5.4. IFRS 15.B26 clarifies that exchanges by customers of one product for another one colour or size for of the same type, quality, condition and price (e.g., another) are not considered returns f or the purposes of applying the standard. Furthermore, contracts in which a customer may return a defective product in exchange for a functioning product need to be evaluated in accordance with the requirements on warranties included in IFRS 15. See furt her discussion on warranties in s ection 9.1. 155 IFRS 15.BC364. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 149

150 from legacy IFRS? ed What’s chang legacy IFRS, revenue was recognised at the time of sale for a transaction Under that provide a customer with a right of return, provided the seller c ould d reliably estimate future returns. In addition, the seller was required to recognise 156 a liability for the expected returns. The standard’s requirements are, legacy IFRS. therefore, not significantly different from rrangements to change materially. We do not expect the net impact of these a not specify the However, there may be some differences as IAS 18 d id presentation of a refund liability or the corresponding debit. IFRS 15 requires that a return asset be recognised in relation to the inventory that may b e returned. In addition, the refund liability is required to be presented separately from the corresponding asset (i.e., on a gross basis, rather than a net basis, see s 5.4 ection 5.2.2 , s ection 5.3 and s ection ). 156 IAS 18.17. Updated October 2018 150 A closer look at IFRS 15, the revenue recognition standard

151 5. Determine the transaction price (updated 2018) October The standard provides the following requirements for determining the transaction price: Extract from IFRS 15 Determining the transaction price 47. An entity shall consider the terms of the contract and its customary business practices to determine the transaction price. The transaction is the amount of consideration to which an entity expects to be price entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for ed in a contract example, some sales taxes). The consideration promis with a customer may include fixed amounts, variable amounts, or both. The nature, timing and amount of consideration promised by a customer 48. affect the estimate of the transaction price. When determining the y shall consider the effects of all of the following: transaction price, an entit (a) v ariable consideration (see paragraphs 50 – 55 and 59); (b) c onstraining estimates of variable consideration (see paragraphs 56 – 58); (c) t he existence of a significant financing component in the contract (see par agraphs 60 – 65); (d) n on - cash consideration (see paragraphs 66 – 69); and – 72). (e) c onsideration payable to a customer (see paragraphs 70 49. For the purpose of determining the transaction price, an entity shall assume that the goods or services will be transferred t o the customer as promised in accordance with the existing contract and that the contract will not be cancelled, renewed or modified. The transaction price is based on the amount to which the entity expects to be ‘entitled’. This amount is meant to reflect the amount to which the entity has s ection 3.2 on contract enforceability rights under the present contract (see and termination clauses). That is, the transaction price does not include estimates of consideration resulting from future change orders for additional goods or services. The amount to which the entity expects to be en titled also excludes amounts collected on behalf of another party, such as sales taxes. As noted in the Basis for Conclusions, the Board decided that the transaction price would not include the effects of the customer’s credit risk, unless the contract 157 ludes a significant financing component (see ection 5.5). inc s The IASB also clarified in the Basis for Conclusions that entities may have rights under the present contract to amounts that are to be paid by parties other than , the customer and if so, these am ounts would be included in the transaction price. For example, in the health care industry, an entity may be entitled under the present contract to payments from the patient, insurance companies and th at or/government organisations. I f the case, the total amount to which is the entity expect s to be entitled need s to be included in the transaction price, 158 regardless of the source. 157 IFRS 15.BC185. 158 IFRS 15.BC187. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 151

152 Determining the transaction price is an important step in applying IFRS 15 because this amount is allocated to the identified performance obligations and is recognised as revenue when (or as) those performance obligations are satisfied. In many cases, the transaction price is readily determinable because the entity receives payment when it transfers promised goods or services and the price is fixed (e.g., a restaurant’s sale of food with a no refund policy). Determining the transaction price is more challenging when it is variable, when payment is received at a time that differs from when the entity provides the ised goods or services or when payment is in a form other than cash. prom Consideration paid or payable by the entity to the customer may also affect the determination of the transaction price. chart illustrates how an entity would determine the The following flow the consideration to be received is fixed or variable: transaction price if Is the consideration expected to be received under the present contract fixed or variable?* Fixed Variable Estimate the amount using either the expected value or most likely amount method for each type of variable consideration (see section 5.2.2) Constrain the estimate to an amount for which a significant is not highly revenue reversal probable (see section 5.2.3) Include the amount in the transaction price Consideration expected to be received under the contract can be variable even when * the stated price in the contract is fixed. This is because the entity may be entitled to consideration only upon the occurrence or non - occurrence of a future event (see section 5.2.1). Frequently asked questions Question 5 1: How would entities determine the presentation of amounts - billed to customers (e.g., shipping and handling, expenses or cost reimbursements and taxes under the standards (i.e., as revenue or as a reduction of costs)? [18 July 2014 TRG meeting; TRG agenda paper no. 2] See response to Question 4 - 8 in section 4.4.4. Updated October 2018 152 A closer look at IFRS 15, the revenue recognition standard

153 5.1 Presentation of sales (and other similar) taxes (updated 2018) October Sales and excise taxes are those levied by taxing authorities on the sales of goods or services. Although various names are used for these taxes, sales taxes generally refer to taxes levied on the purchasers of the goods or services and excis e taxes refer to those levied on the sellers of goods or services. s The standard includes a general principle that an entity determine the transaction price exclusive of amounts collected on behalf of third some sales taxes). Following the issuance of the standard, parties (e.g., some stakeholders informed the Board’s staff that there could be multiple interpretations about whether certain items that are billed to customers need to be presented as revenue or as a reduction of costs. Examples of such unts include shipping and handling fees, reimbursements of out - amo of - pocket expenses and taxes or other assessments collected and remitted to government authorities. At the July 2014 TRG meeting, members of the TRG generally agreed that the standard is clear that any amounts that are not collected on behalf of third parties would be included in the transaction price (i.e., revenue). That is, if the amounts were incurred by the entity in fulfilling its performance obligations, the amounts are included in the transaction price and recorded as revenue. Several TRG members noted that this would require entities to evaluate taxes collected in all jurisdictions in which they operate to determine whether a tax is levied on the entity or the customer. In addition, T RG members indicated that an entity would apply the principal ve rsus agent application guidance (see 4.4 above) when it is not clear whether the amounts are collected on s ection behalf of third parties. This could result in amounts billed to a customer be ing recorded net of costs incurred (i.e., on a net basis). FASB differences he FASB ’s T s an entity to make an accounting policy election standard allow to present revenue net of certain types of taxes (including sales, use, excise, value - added and some excise taxes) with a requirement for preparers to disclose the policy. As a result, entities that make thi do not need s election to evaluate taxes that they collect (e.g., sales, use, value - added, some excise taxes) in all jurisdictions in which they operate in order to determine whether a tax is levied on the entity or the customer. This type of evaluation would otherwise be necessary to meet the standard’s requirement to exclude from the transaction price any “amounts collected on behalf of third parties (for 159 example, some sales taxes)”. The IASB decided not to similar accounting policy election in include a IFRS 15 , noting that the requirements of IFRS 15 are consistent with legacy 160 IFRS requirements. As a result , differences may arise between entities applying IFRS 15 and those applying ASC 606. 159 IFRS 15.47. 160 IFRS 15.BC188D. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 153

154 5.2 Variable consideration entity’s expectations about the consideration The transaction price reflects an to which it will be entitled to receive from the customer. The standard provides the following requirements for determining whether consideration is variable and, if so, how it would be treated under the model : Extract from IFRS 15 50. If the consideration promised in a contract includes a variable amount, an entity shall estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to customer. a 51. An amount of consideration can vary because of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties or other similar items. The promised consideration can also vary if an entity’s entitlement to the consideration is contingent on the occurrence or non - occurrence of a future event. For example, an amount of consideration would be variable if either a product was sold with a right of return or a fixed amount is pr omised as a performance bonus on achievement of a specified milestone. 52. The variability relating to the consideration promised by a customer may be explicitly stated in the contract. In addition to the terms of the contract, the promised consideration is variable if either of the following circumstances exists: (a) t he customer has a valid expectation arising from an entity’s customary business practices, published policies or specific statements that the entity will accept an amount of consideration that is less than the price stated in the contract. That is, it is expe cted that the entity will offer a price concession. Depending on the jurisdiction, industry or customer this offer may be referred to as a discount, rebate, refund or credit. (b) o ther facts and circumstances indicate that the entity’s intention, when enterin g into the contract with the customer, is to offer a price concession to the customer. These concepts are discussed in more detail below. (updated 2018) 5.2.1 Forms of variable consideration October descri IFRS 15.51 ’variable consideration’ broadly to includ e discounts, bes rebates, refunds, credits, price concessions, incentives, performance bonuses and penalties. Variable consideration can result from explicit terms in a contract to which the parties to the contract agreed or can be implied by an entity’ s past business practices or intentions under the contract. It is important for entities to appropriately identify the different instances of variable consideration included in a contract because the second step of estimating variable consideration require s ection 5.2.3) to s entities to apply a constraint (as discussed further in all variable consideration. Many types of variable consideration identified in IFRS 15 were also considered variable consideration under legacy IFRS. An example of this is where a portion of the transaction price depends on an entity meeting specified performance conditions and there is uncertainty about the outcome. This portion of the transaction price would be considered variable (or contingent) consideration legacy FRS and IFRS I 15. under both Updated October 2018 154 A closer look at IFRS 15, the revenue recognition standard

155 The Board noted in the Basis for Conclusions that consideration can be variable even when the stated price in the contract is fixed. This is because the entity may be entitled to consideration only upon the occurrence or non - occurrence 161 f a future event. description For example, IFRS 15’s o of variable consideration includes amounts resulting from variability due to customer refunds or returns. As a result, a contract to provide a customer with 100 widgets at a fixed price per widget would be considered to include a variable component if the customer has the ability to return the widgets (see s ection 5.4.1). In many transactions, entities have variable consideration as a result of rebates and/or discounts on the price of products or services they provide to customers once the customers meet sp ecific volume thresholds. The standard contains the following example relating to volume discounts: Extract from IFRS 15 Example 24 — Volume discount incentive (IFRS 15.IE124 - IE128) An entity enters into a contract with a customer on 1 January 20X8 to sell Product A for CU100 per unit. If the customer purchases more than 1,000 units of Product A in a calendar year, the contract specifies that the price per unit is retrospectively red uced to CU90 per unit. Consequently, the consideration in the contract is variable. For the first quarter ended 31 March 20X8, the entity sells 75 units of Product A to the customer. The entity estimates that the customer's purchases will not exceed the 1, unit threshold required for the volume 000 - discount in the calendar year. – 58 of IFRS 15 on The entity considers the requirements in paragraphs 56 constraining estimates of variable consideration, including the factors in determines that it has significant paragraph 57 of IFRS 15. The entity experience with this product and with the purchasing pattern of the entity. Thus, the entity concludes that it is highly probable that a significant reversal in the cumulative amount of revenue recognised (ie CU100 per u nit) will not occur when the uncertainty is resolved (ie when the total amount of purchases is known). Consequently, the entity recognises revenue of CU7,500 (75 units × CU100 per unit) for the quarter ended 31 March 20X8. In May 20X8, the entity's custom er acquires another company and in the second quarter ended 30 June 20X8 the entity sells an additional 500 units of Product A to the customer. In the light of the new fact, the entity estimates that the customer's purchases will exceed the 1,000 - unit thre shold for the calendar year and therefore it will be required to retrospectively reduce the price per unit to CU90. Consequently, the entity recognises revenue of CU44,250 for the quarter ended 30 June 20X8. That amount is calculated from CU45,000 for the sale of 500 units (500 units × CU90 per unit) less the change in transaction price of CU750 (75 units × CU10 price reduction) for the reduction of revenue relating to units sold for the quarter ended 31 March 20X8 (see paragraphs 87 and 88 of IFRS 15). 161 IFRS 15.BC191. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 155

156 Frequently asked questions - 2 : Should volume rebates and/or discounts on goods or services Question 5 be accounted for as variable consideration or as customer options to acquire additional goods or services at a discount? - 1 5 in s ection 4.6. See response to Question 4 - 3 : How would an entity distinguish between a contract that Question 5 contains an option to purchase additional goods or services and a contract that includes variable consideration based on a variable quantity (e.g., a – - based fee)? [TRG Meeting 9 November 2015 usage Agenda paper no. 48] See response to Question 4 1 2 in s ection 4.6. - Question 5 - 4 : Should liquidated damages, penalties or compensation from other similar clauses be accounted for as variable consideration or warranty provisions under the standard? Most liquidated damages, penalties and similar payments should be accounted for as variable consideration. However, in limited situations, we believe that amounts that are based on the actual performance of a delivered good or service may be considered similar to warranty payments (e.g., in situations in which an entity pays the customer’s direct costs to remedy a def ect). Some contracts provide for liquidated damages, penalties or other damages if an entity fails to deliver future goods or services or if the goods or services fail to meet certain specifications. IFRS 15.51 includes ‘penalties’ as an variable consideration and describes how promised consideration example of in a contract can be variable if the right to receive the consideration is - occurrence of a future event (e.g., the contingent on the occurrence or non n entity pays a penalty if it fails to perform according contract specifies that a to the agreed upon terms). Penalties and other clauses that are considered similar to warranty provisions would be accounted for as: (a) Consideration paid or payable to a customer (which may be variable consideration , see s ection 5.7) Or An assurance (b) - type or service - type warranty (see s ection 9.1 on warranties) Cash fines or penalties paid to a customer would generally be accounted for under the requirements on consideration payable to a customer. However, we belie ve there may be situations in which it is appropriate to account for cash payments as an assurance type warranty (e.g., an entity’s direct - reimbursement to the customer for costs paid by the customer to a third party for repair of a product). Question 5 - 5 : If a contract includes an undefined quantity of outputs, but the contractual rate per unit is fixed, is the consideration variable? [TRG meeting 13 July 2015 – Agenda paper no. 39] Yes. TRG members generally agreed that if a contract includes an unknown uantity of tasks, throughout the contract period, for which the entity has q enforceable rights and obligations (i.e., the unknown quantity of tasks is services, as described in or not an option to purchase additional goods Updated October 2018 156 A closer look at IFRS 15, the revenue recognition standard

157 Frequently asked questions (cont’d) s 4 1 2 Question in - ection 4.6) and the consideration received is contingent upon the quantity completed, the total transaction price would be variable. This is because the contract has a range of possible transaction prices and consideration depend s on the occurrence or non - occurrence of the ultimate a future event (e.g., customer usage), even though the rate per unit is fixed. The TRG agenda paper on this topic noted that an entity would need to consider contractual minimums (or other clau ses) that would make some or all of the consideration fixed. Question 5 - : If a contract is denominated in a currency other than that of 6 the entity’s functional currency, should changes in the contract price due to exchange rate fluctuations be accounted for as variable consideration? We believe that changes to the contract price due to exchange rate fluctuations do not result in variable consideration. These price fluctuations are a consequence of entering into a contract that is denominated in a foreign currency, rather than a result of a contract term like a discount or rebate or one that depends on the occurrence or non - occurrence of a future event, as described in IFRS 15.51. The variability resulting from changes in foreign exchange rates relates to the form of the consideration (i.e., it is in a currency other than the entity’s , we believe that it would not be considered functional currency) . As such variable consideration when determining the transaction price. This variability may, instead, need to be accounted for in accordanc e with IFRS 9 if it is a separable embedded derivative. Otherwise, an entity would account for this variability in accordance with IAS 21 The Effects of Changes in Foreign . Exchange Rates spe cifies IFRIC 22 Foreign Currency Transactions and Advance Consideration that when consideration denominated in a foreign currency is recognised in advance of the associated revenue, the appropriate application of IAS 21 is to measure the revenue using the exchange rate at the date the advanced 162 . receipt is recognised Question 5 - 7: How would an entity account for price protection or price matching clauses included in a contract with a customer? rice protection or price matching clauses Clauses subject to p that require an entity to refund a portion of the to the customer in certain consideration IFRS 15 . situations should be accounted for as variable consideration under That is, we believe that, if an entity is required to retrospectively apply lower prices to previous purchases made by a customer (or has a past business practice of doing so , even if the contractual terms would only require prospective application), the consideration would be accounted for as variable consideration . 162 IFRIC 22.8 A closer look at IFRS 15, the revenue recognition standard Updated October 2018 157

158 Frequently asked questions (cont’d) Examples include contracts between an entity and a customer that provide, as a matter of formal agreement or due to an entity’s business either practices , that the entity will refund or provide a credit equal to a portion of s the original purchase price tow ard future purchases if the entity subsequently reduces its price for a previously delivered product and the customer still has inventory of that product on hand. An entity may also offer to match a price and provide a refund of the difference if the customer finds competitor’s for a lower price the same product offered by one of the entity’s competitors during a specified period of time following the sale. u red nation’ or ‘most Contracts with customers also may contain ‘most favo u red customer ’ clauses under which the entity guarantees that the price favo of any products sold to the customer after contract inception will be the lowest price offer s the entity to any other customer. How consideration from such contracts would be accounted for under IFRS 15 depend s on the terms of the clause (i.e., whether the price protection is offered prospectively or retrospectively). We believe that clauses that require an entity to prospectively provide a customer with its best prices o n any purchases of products after the sed for goods execution of a contract have no effect on the revenue recogni consideration the would or services already transferred to the customer (i.e., not be accounted for as variable consideration). However, if an entity is required to retrospectively apply lower prices to previous purchases made by a customer ( or has a past business practice of doing so even if the written contractual terms would only require prospective application ), we believe the contract includes a form of price protection and the consideration subject to this provision would be accounted for as variable consideration as discussed above. , We note that t hese clauses may be present in arrangements with governmental agencies. For exa mple, an entity may be required to monitor discounts given to comparable customers during the contract period and to refund the difference between what was paid by the government and the price granted to comparable commercial customers. ) discounts represent Question 5 - 8: Do early payment (or prompt pay ment a form of variable consideration? Yes. Contracts with customers may include a discount for early payment ( ‘prompt payment’ discount) under which the customer can pay less than or an invoice’s stated amount if the payment is made within a certain period of time. For example, a customer might receive a 2% discount if the payment is within 15 days made of receipt ( if payment is ot herwise due within 45 days of receipt). Because the am ount of consideration to be received by the entity would vary depending on whether the customer takes ad vantage of the variable transaction price would be accounted for as discount, the consideration . 5.2.1.A Implicit price concessions For some contracts, the stated price has easily identifiable variable components. However, for other contracts, the consideration may be variable because the facts and circumstances indicate that the entity may accept a lower price than the amount stated in the contract (i.e., it expects to provide an implicit price concession). This could be a result of the customer’s valid expectation that the entity will reduce its price because of the entity’s Updated October 2018 158 A closer look at IFRS 15, the revenue recognition standard

159 customary business pra ctices, published policies or specific statements made by the entity. An implicit price concession could also result from other facts and circumstances indicating that the entity intended to offer a price concession to the customer when it entered into the contract. For example, an entity may accept a lower price than the amount stated in the contract to develop or enhance a customer relationship or because the incremental cost of providing the service to the customer is not significant and the total co nsideration it expects to collect provides a sufficient margin. The standard provides the following example of when an implicit price concession exists and the transaction price, therefore, is not the amount stated in the contract: Extract from IFRS 15 Example 2 — Consideration is not the stated price – implicit price concession (IFRS 15.IE7 IE9) - An entity sells 1,000 units of a prescription drug to a customer for promised consideration of CU1 million. This is the entity's first sale to a customer in a new region, which is experiencing significant economic difficulty. Thus, the entity expects that it will not be able to collect from the customer the full amount of the promised consideration. Despite the possibility of not collecting the full amount, th e entity expects the region's economy to recover over the next two to three years and determines that a relationship with the customer could help it to forge relationships with other potential customers in the region. When assessing whether the criterion in paragraph 9(e) of IFRS 15 is met, the entity also considers paragraphs 47 and 52(b) of IFRS 15. Based on the assessment of the facts and circumstances, the entity determines that it expects to provide a price concession and accept a lower amount of c onsideration from the customer. Accordingly, the entity concludes that the transaction price is not CU1 million and, therefore, the promised consideration is variable. The entity estimates the variable consideration and determines that it expects to be e ntitled to CU400,000. The entity considers the customer's ability and intention to pay the consideration and concludes that even though the region is experiencing economic difficulty, it is probable that it will collect CU400,000 from the customer. Conseq uently, the entity concludes that the criterion in paragraph 9(e) of IFRS 15 is met based on an estimate of variable consideration of CU400,000. In addition, on the basis of an evaluation of the contract terms and other facts and circumstances, the entity concludes that the other criteria in paragraph 9 of IFRS 15 are also met. Consequently, the entity accounts for the contract with the customer in accordance with the requirements in IFRS 15. Variable consideration may also result from extended payment terms in a contract and any resulting uncertainty about whether the entity will be willing to accept a lower amount when it is paid in the future. That is, an entity has implied price to evaluate whether the extended payment terms represent an concession because the entity does not intend to, or will not be able to, collect all amounts due in future periods. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 159

160 However, in the Basis for Conclusions, the IASB acknowledged that, in some cases, it may be difficult to determine whether the entity has implicitly offered a price concession or whether the entity has chosen to accept the risk of the impairment customer defaulting on the contractually agreed consideration (i.e., 163 The Board did not develop detailed application guidance to assist in losses). distinguishing between price concessions (recognised as variable consideration, within revenue) and impairment losses (recognised as a bad debt expense, consider all relevant facts and outside of revenue). Therefore, entities need to circumstances when analysing situations in which an entity is willing to accept a lower price than the amount stated in the contract. Appropriately distinguishing between price concessions (i.e., reductions of revenue) and customer credit risk (i.e., bad debt) for collectability concerns that were known at contract inception is important becaus e it affect s whether a valid contract exists (see ection 3.1.5) and the subsequent accounting for s the transaction. If an entity d etermines at contract inception that a contract includes a price concession (i.e., variable consideration), any change in the estimate of the amount the entity expects to collect, absent an identifiable credit event, is accounted for as a change in the transaction price. That is, a decrease in the amount the entity expects to collect would be recorded as a reduction in revenue and not as a bad debt expense, unless there is an event that affects a customer’s ability to pay some or all of the transaction price As (e.g., a known decline in a customer’s operations, a bankruptcy filing). 2 in IFRS 15 (in the extract above), entities may estimate illustrated in Example a transaction price that is significantly lower than the stated invoice or contractual amount, but still consider the difference between those amounts to be variable consideration (e.g., a price concession), rather than a collectability issue related to bad debt. Under legacy IFRS, such amounts were likely expen sed as bad debts, rather than being reflected as a reduction of revenue. 5.2.2 Estimating variable consideration (updated October 2018) An entity is required to estimate variable consideration using either the ’expected value’ or the ’most likely amount’ m ethod, as described in the standard: Extract from IFRS 15 53. An entity shall estimate an amount of variable consideration by using either of the following methods, depending on which method the entity expects to better predict the amount of consideration to which it will be entitled: (a) The expected value — the expected value is the sum of probability - weighted amounts in a range of possible consideration amounts. An expected value may be an appropriate estimate of the amount of variable considerat ion if an entity has a large number of contracts with similar characteristics. (b) The most likely amount — the most likely amount is the single most likely amount in a range of possible consideration amounts (ie the single The most likely amount may be most likely outcome of the contract). an appropriate estimate of the amount of variable consideration if the contract has only two possible outcomes (for example, an entity either achieves a performance bonus or does not). 163 IFRS 15.BC194. Updated October 2018 160 A closer look at IFRS 15, the revenue recognition standard

161 Extract from IFRS 15 (cont’d) 54. An entity shall apply one method consistently throughout the contract when estimating the effect of an uncertainty on an amount of variable consideration to which the entity will be entitled. In addition, an entity shall consider all the information ( historical, current and forecast) that is reasonably available to the entity and shall identify a reasonable number of possible consideration amounts. The information that an entity uses to similar estimate the amount of variable consideration would typically be to the information that the entity's management uses during the bid - and - proposal process and in establishing prices for promised goods or services. the An entity is required to choose between the expected value method and most likely amount method based on which method better predicts the amount of consideration to which it will be entitled. That is, the method selected is not meant to be a ‘free choice’. Rather, an entity selects the method that is best suited, based on the specific facts and circumstances of the contract. An entity applies the selected method consistently to each type of variable consideration throughout the contract term and updates the estimated variable consideration at the end of each reporting pe riod. Once it selects a method, an entity is required to apply that method consistently for similar types of variable consideration in similar types of contracts. In the Basis for Conclusions, the Board noted that a contract may contain different types o f variable 164 consideration. As such, it may be appropriate for an entity to use different methods (i.e., expected value or most likely amount) for estimating different types of variable consideration within a single contract. Entities determine the expected value of variable consideration using the sum of probability weighted amounts in a range of possible amounts under the - contract. To do this, an entity identifies the possible outcomes of a contract and the probabilities of those outcomes. The Board indicated in the Basis for Conclusions that the expected value method may better predict expected consideration when an entity has a large number of contracts with similar 165 characteristics. This method may also better predict con sideration when an entity has a single contract with a large number of possible outcomes. The IASB clarified that an entity preparing an expected value calculation is not required to consider all possible outcomes, even if the entity has extensive data an d can identify many possible outcomes. Instead, the IASB noted in the Basis for Conclusions that, in many cases, a limited number of discrete outcomes and 166 probabilities can provide a reasonable estimate of the expected value. likely amount of variable consideration using the Entities determine the most single most likely amount in a range of possible consideration amounts. The Board indicated in the Basis for Conclusions that the most likely amount method may be the better predictor when the entity expect s to be entitled to one of 167 two possible amounts. For example, a contract in which an entity is entitled to receive all or none of a specified performance bonus, but not a portion of that bonus. The standard states that when applying either of these metho ds, an entity considers all information (historical, current and forecast) that is reasonably available to the entity. Some stakeholders questioned whether an entity would be applying the portfolio approach practical expedient in IFRS 15.4 (see 164 IFRS 15.BC202. 165 IFRS 15.BC200. 166 IFRS 15.BC201. 167 IFRS 15.BC200. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 161

162 s ection 3.1 ) when considering evidence from other, similar contracts to 3. develop an estimate of variable consideration using an expected value method. TRG members discussed this question and generally agreed that an entity would ch practical expedient if it used a portfolio not be applying the portfolio approa of data from its historical experience with similar customers and/or contracts. TRG members noted that an entity could choose to apply the portfolio approach 168 so. practical expedient, but would not be required to do Use of this practical expedient requires an entity to assert that it does not expect the use of the expedient to differ materially from applying the standard to an individual contract. The TRG agenda paper noted that using a portfolio of data is not equivalent to using the portfolio approach practical expedient, so entities that use the expected value method to estimate variable consideration would not be required to assert that the outcome from the portfolio is not expected to materially differ fro m an assessment of individual contracts. IFRS? What’s chang from legacy ed Upon adoption of IFRS 15, m any entities will see significant changes in how they account for variable consideration on adoption of IFRS 15. This will be an even more significant change for entities that previously did not attempt to estimate variable consideration under legacy IFRS and simply recognise d such amounts when received or known with a high degree of certainty (e.g., upon receipt of a report from a customer detailing the amount of revenue due to the entity). As an example, the standard may change practice for many entities that sell their products through distributors or resellers. Before revenue could be recognised, IAS 18.14 require d that the amount of revenue be measured reliably and that it be probable that the economic benefits associated with the transaction will f low to the entity. As a result, when the sales price charged to the distributor or reseller wa s not finalised until the product wa s sold to the wa end - customer, entities may have wait ed until the product s sold to the end - customer to recognise revenue. er IFRS 15, waiting until the end - sale has occurred Und no longer acceptable is if the only uncertainty is the variability in the pricing. This is because IFRS 15 requires an entity to estimate the variable consideration (i.e., the end - sales price) based on t he information available, taking into consideration the effect of the constraint on variable consideration. However, in some cases, the outcomes under IFRS 15 and legacy IFRS may be similar if a significant portion of the estimated revenue is constrained. 168 TRG Agenda paper no. 38, Portfolio Practical Expedient and Application of Variable dated 13 July 2015. Consideration Constraint, Updated October 2018 162 A closer look at IFRS 15, the revenue recognition standard

163 Frequently asked questions 9: - Are there any situations in which an entity would not have to Question 5 estimate variable consideration at contract inception under IFRS 15 ? An entity may not have to variable consideration at the inception of estimate tract in the following situations: a con Allocation of variable consideration exception — When the terms of • part a variable payment relate to an entity’s efforts to satisfy a specific of a contract (i.e., one or more (but not all) performance obligation s or s and allocating the s promised in a series ) distinct good or service consideration to this specific part is consistent with the overall allocation objectives of the standard, IFRS 15 requires variable consideration to be fic part of a contract. , variable allocated entirely to that speci As a result the purpose consideration would not be estimated for of recognising revenue. For example, an entity that provides a series of distinct hotel management services and receives a variable fee based on a fixed perc entage of rental revenue may be able to allocate the percentage of monthly rental revenue entirely to the period in which the consideration is earned if the criteria to use this allocation exception are met. See riable consideration allocation section 6.3 for further discussion of the va exception. When an entity recognises • ‘right to invoice’ practical expedient — The to revenue over time, t he right to invoice practical expedient allows it recognis an for e revenue as invoiced if the entity’s right to payment is amount that corresponds directly with the value to the customer of the entity’s performance to date. For example, an entity may not be required estimate the variable consideration - year service contract to for a three under which it has a right to in voice the customer a fixed amount for each hour of service rendered , provided that fixed amount reflects the value to the customer. See section 7 . 1.4.A for further discussion of the right to invoice practical expedient. es of intellectual Sales - based and usage - based royalt ies on licen c • property recognition constraint — The standard provides explicit application guidance for recognising consideration from sales - based and based royalties provided in exchange for licences of intellectual usage - property. The s tandard states that an entity recognise sales - based and s - usage based royalties as revenue at the later of when: (1) the subsequent , sales or usage occurs; or (2) the performance obligation to which some , or all - based or usage - based royalty has been allocated has of the sales been satisfied (or partially satisfied). In many cases, using this application guidance results in the same pattern of revenue recognition as fully constraining the estimate of variable consideration associated with the future royalty s tream. However, in cases where an entity is required to allocate sales - based or usage - based royalties to separate performance obligations in a contract, it may need to include expected royalties in its estimate of the stand - alone selling price of one or m ore of the performance obligations . See section 8.5 for further discussion about based and usage - based royalties related to licences of intellectual - sales property. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 163

164 5.2.3 Constraining estimates of variable consideration (updated October 2018) Before it can include any amount of variable consideration in the transaction price, an entity must consider whether the amount of variable consideration is required to be constrained. The Board explained in the Basis for Conclusions that it created this c onstraint on variable consideration to address concerns raised by many constituents that the standard could otherwise require recognition of revenue before there was sufficient certainty that the amounts to which an entity expects recognised would faithfully depict the consideration to be entitled in exchange for the goods or services transferred to a 169 customer. The IASB explained in the Basis for Conclusions that it did not intend to eliminate the use of estimates from the revenue recognition standard. stead, it wanted to make sure the estimates are robust and result in useful In 170 information. Following this objective, the Board concluded that it was appropriate to include estimates of variable consideration in revenue only when an entity has a ‘high degre e of confidence’ that revenue will not be reversed in a subsequent reporting period. Therefore, as the following extract from the standard states, the constraint is aimed at preventing the over - recognition of revenue (i.e., the standard focuses on potenti al significant reversals of revenue): Extract from IFRS 15 56. An entity shall include in the transaction price some or all of an amount of variable consideration estimated in accordance with paragraph 53 only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consider ation is subsequently resolved. in the 57. In assessing whether it is highly probable that a significant reversal amount of cumulative revenue recognised will not occur once the uncertainty related to the variable consideration is subsequently resolved, an entity shall consider both the likelihood and the magnitude of the revenue reversal. Factors that could in crease the likelihood or the magnitude of a revenue reversal include, but are not limited to, any of the following: t he amount of consideration is highly susceptible to factors outside the (a) entity’s influence. Those factors may include volatility in a market, the judgement or actions of third parties, weather conditions and a high risk of obsolescence of the promised good or service. (b) t he uncertainty about the amount of consideration is not expected to be resolved for a long period of time. (c) t he entity’s experience (or other evidence) with similar types of contracts is limited, or that experience (or other evidence) has limited predictive value. (d) t he entity has a practice of either offering a broad range of price concessions or changing the payment terms an d conditions of similar contracts in similar circumstances. (e) t he contract has a large number and broad range of possible consideration amounts. 169 IFRS 15.BC203. 170 IFRS 15.BC204. Updated October 2018 164 A closer look at IFRS 15, the revenue recognition standard

165 To include variable consideration in the estimated transaction price, the entity has to conclude that it is ’hig hly probable’ that a significant revenue reversal occur once the uncertainty related to the variable will not in future periods consideration is resolved . For the purpose of this analysis, the meaning existing definition in IFRS, of the term ‘highly probable’ is consistent with the 171 . “significantly more likely than probable” i.e., FASB differences For US GAAP preparers, ASC 606 uses the term ’probable’ as the confidence threshold for applying the constraint, rather than ‘highly probable’, which is 172 defined as “the future event or events are likely to occur.” However, the meaning of ‘probable’ under US GAAP is intended to be the same as ‘highly 173 probable’ under IFRS. Furthermore, the IASB noted that an entity’s analysis to determine whether its esti is largely mate of variable consideration should be constrained 174 s That is, an entity need qualitative. to use judgement to evaluate whether it has met the objective of the constraint (i.e., it is highly probable that a significant occur in future periods) considering the factors revenue reversal will not provided in the standard that increase the probability of a significant revenue reversal (discussed further below) . In addition, conclusions about amounts that may result in a significant revenue reversal m ay change as an entity satisfies a performance obligation . An entity need both the likelihood and magnitude of a revenue s to consider reversal to apply the constraint : Likelihood • assessing the likelihood of a future reversal of revenue require s – significant judgement. Entities want to ensure that they adequately document the basis for their conclusions. The presence of any one of the indicators cited in the extract above does not necessarily mean that a eration is included in the transaction reversal will occur if the variable consid price. The standard includes factors, rather than criteria, to signal that the list of items to consider is not a checklist for which all items need to be met. In addition, the factors provided are not meant to be an all - inclusive list and entities may consider additional factors that are relevant to their facts and circumstances. • Magnitude — when assessing the probability of a significant revenue reversal, an entity is also required to assess the magnitude of that rev ersal. The constraint is based on the probability of a reversal of an amount that is ‘significant’ relative to the cumulative revenue recognised for the contract. When assessing the significance of the potential revenue reversal, the cumulative revenue rec ognised at the date of the potential reversal includes both fixed and variable consideration and includes revenue recognised from the entire contract, not just the transaction price allocated to a single performance obligation. 171 As defined in IFRS 5 Appendix A. 172 For US GAAP, the term ‘probable’ is defined in the master glossary of the US Accounting Standards Codification as “the future event or events are likely to occur”. 173 IFRS15.BC211. 174 IFRS15.BC212. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 165

166 An entity must carefully eva luate the factors that could increase the likelihood or the magnitude of a revenue reversal, including those listed in IFRS 15.57: The amount of consideration is highly susceptible to factors outside the • e dg entity’s influence (e.g., volatility in a market, ju ment or actions of third parties, weather conditions, high risk of obsolescence of the promised good or service). • The uncertainty about the amount of consideration is not expected to be resolved for a long period of time. The entity’s experience (or oth er evidence) • similar types of contracts is of limited, or that experience (or other evidence) has limited predictive value. • The entity has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances. • The contract has a large number and broad range of possible consideration amounts. Illustration 5 - 1 — Evaluating the factors that could increase the likelihood or magnitude of a significant revenue reversal Assume that an insurance broker receives ‘trailing commissions’ of CU100 every time a consumer signs up for a new insurance policy and CU50 whenever one of those consumers renews a policy. In this fact pattern, the broker has a large pool of historical dat a about customer renewal patterns, given its significant experience with similar contracts. The broker considers the above factors and notes that the amount of consideration is highly susceptible to factors outside its influence and the years. However, it also has significant several over uncertainty could remain experience with similar types of contracts and its experience has predictive value. As a result, even though the amount of consideration the entity will be entitled to is uncertain and depends o n the actions of third parties (i.e., customer renewals), it is likely that the entity can estimate a minimum amount of variable consideration for which it is highly probable that a significant reversal of cumulative revenue will not occur. Assuming the br oker’s performance is complete upon initial signing of a contract, the broker would recognise the initial CU100 fee plus the minimum amount related to future renewals that is not constrained. There are some types of variable consideration that are frequently included in contracts that have significant uncertainties. It likely more difficult for is an entity to assert it is highly probable that these types of estimated amounts equently reversed. Examples of the types of variable will not be subs consideration include the following: Payments contingent on regulatory approval (e.g., • regulatory approval of a new drug) • Long - term commodity supply arrangements that settle based on market prices at th e future delivery date fees Contingency fees based on litigation or regulatory outcomes (e.g., • based on the positive outcome of litigation or the settlement of claims with government agencies) Updated October 2018 166 A closer look at IFRS 15, the revenue recognition standard

167 When an entity determines that it cannot meet the highly probab le threshold if it includes all of the variable consideration in the transaction price, the amount of variable consideration that must be included in the transaction price is limited t o the amount that would not result in a significant revenue reversal. T hat is, the estimate of variable consideration is reduced until it reaches an amount that can be included in the transaction price that, if subsequently reversed when the uncertainty associated with the variable consideration is resolved, would not in a significant reversa l of cumulative revenue recognis ed. When there is result significant uncertainty about the ultimate pricing of a contract, entities should not default to constrain ing the estimate of variable consideration to zero . The standard includes an example in which the application of the constraint limits the amount of variable consideration included in the transaction price and one in which it does not: Extract from IFRS 15 Example 23 — Price concessions (IFRS 15.IE116 - IE123) An entit y enters into a contract with a customer, a distributor, on 1 December 20X7. The entity transfers 1,000 products at contract inception for a price stated in the contract of CU100 per product (total consideration is CU100,000). Payment from the customer is due when the customer sells the products to the end customers. The entity's customer generally sells the products within 90 days of obtaining them. Control of the products transfers to the customer on 1 December 20X7. On the basis of its past practices a nd to maintain its relationship with the customer, the entity anticipates granting a price concession to its customer because this will enable the customer to discount the product and thereby move the product through the distribution chain. Consequently, t he consideration in the contract is variable. Case A — Estimate of variable consideration is not constrained The entity has significant experience selling this and similar products. The observable data indicate that historically the entity grants a price concession of approximately 20 per cent of the sales price for these products. Current market information sugg ests that a 20 per cent reduction in price will be sufficient to move the products through the distribution chain. The entity has not granted a price concession significantly greater than 20 per cent in many years. o which the entity will be entitled, To estimate the variable consideration t the entity decides to use the expected value method (see paragraph 53(a) of IFRS 15) because it is the method that the entity expects to better predict the amount of consideration to which it will be entitled. Using th e expected value method, the entity estimates the transaction price to be CU80,000 (CU80 × 1,000 products). The entity also considers the requirements in paragraphs 56 – 58 of IFRS 15 on constraining estimates of variable consideration to determine whether the estimated amount of variable consideration of CU80,000 can be included in the transaction price. The entity considers the factors in paragraph 57 of IFRS 15 and determines that it has significant previous experience with this product and current marke t information that supports its estimate. In addition, despite some uncertainty resulting from factors outside its influence, based on its current market estimates, the entity expects the price ncludes that it to be resolved within a short time frame. Thus, the entity co A closer look at IFRS 15, the revenue recognition standard Updated October 2018 167

168 Extract from IFRS 15 (cont’d) is highly probable that a significant reversal in the cumulative amount of revenue recognised (ie CU80,000) will not occur when the uncertainty is resolved (ie when the total amount of price concessions is determined). Consequently, the entity recognises CU80,000 as revenue when the products are transferred on 1 December 20X7. Case B — Estimate of variable consideration is constrained The entity has experience selling similar products. However, the entity's pr oducts have a high risk of obsolescence and the entity is experiencing high volatility in the pricing of its products. The observable data indicate that historically the entity grants a broad range of price concessions ranging from 20 – 60 per cent of the sales price for similar products. Current market information also suggests that a 15 – 50 per cent reduction in price may be necessary to move the products through the distribution chain. To estimate the variable consideration to which the entity will be ent itled, the entity decides to use the expected value method (see paragraph 53(a) of IFRS 15) because it is the method that the entity expects to better predict the amount of consideration to which it will be entitled. Using the expected value method, the e ntity estimates that a discount of 40 per cent will be provided and, therefore, the estimate of the variable consideration is CU60,000 (CU60 × 1,000 products). 58 of IFRS 15 – The entity also considers the requirements in paragraphs 56 on constraining estima tes of variable consideration to determine whether some or all of the estimated amount of variable consideration of CU60,000 can be included in the transaction price. The entity considers the factors in paragraph 57 of IFRS 15 and observes that the amount of consideration is highly susceptible to factors outside the entity's influence (ie risk of obsolescence) and it is likely that the entity may be required to provide ons to move the products through the a broad range of price concessi distribution chain. Consequently, the entity cannot include its estimate of CU60,000 (ie a discount of 40 per cent) in the transaction price because it cannot conclude that it is highly probable that a significant rever sal in the amount of cumulative revenue recognised will not occur. Although – 60 per cent, the entity's historical price concessions have ranged from 20 market information currently suggests that a price concession of 15 – 50 per cent will be necessary. The entity's actual results have been consistent with current market information in previous, similar transactions. then - Consequently, the entity concludes that it is highly probable that a significant reversal in the cumulative amount of revenue recognised w ill not occur if the entity includes CU50,000 in the transaction price (CU100 sales price and a 50 per cent price concession) and therefore, recognises revenue at that amount. Therefore, the entity recognises revenue of CU50,000 when the nsferred and reassesses the estimates of the transaction products are tra price at each reporting date until the uncertainty is resolved in accordance with paragraph 59 of IFRS 15. Updated October 2018 168 A closer look at IFRS 15, the revenue recognition standard

169 In some situations, it is appropriate for an entity to include in the transaction price an estimate of variable consideration that is not a possible outcome of an individual contract. The TRG discussed this topic using the following example 175 : from the TRG agenda paper e stimating variable consideration using the expected value Example of method Entity A develops websites for customers. The contracts include similar terms and conditions and contain a fixed fee, plus variable consideration for a performance bonus related to the timin g of Entity A completing the website. Based on Entity A’s historical experience, the bonus amounts and associated probabilities for achieving each bonus are as follows: Bonus amount Probability of outcome - 15% CU50 40% CU100 45% Analysis Entity A determines that using the expected value method would better predict the amount of consideration to which it will be entitled than using the most likely amount method because it has a large number of contracts that have characteristics that are s imilar to the new contract. Under the expected value method, Entity A estimates variable consideration of CU65,000 [(0 x 15%) + (50,000 x 40%) + (100,000 x 45%)]. Entity A must then consider the effect of applying the constraint on variable consideration. To do this, Entity A considers the factors that could increase the likelihood of a revenue reversal in IFRS 15.57 and concludes that it has relevant historical experience with similar types of contracts and that the amount of consideration is not highly s tors outside of its influence. usceptible to fac In determining whether the entity would include CU50,000 or CU65,000 in the transaction price, TRG members generally agreed that when an entity has concluded that the expected value approach is the appropri ate method to estimate variable consideration, the constraint is also applied based on the expected value method. That is, the entity is not required to switch from an expected value method to a most likely amount for purposes of applying the constraint. As a result, if an entity applies the expected value method for a particular contract, the estimated transaction price may not be a possible outcome in an individual contract. Therefore, the entity could conclude that, in this example, CU65,000 is the appropriate estimate of variable consideration to include in the transaction price. It is important to note that in this example, the entity had concluded that none of the factors in IFRS 15.57 or any other factors indicate a likelihood of a significant re venue reversal. When an entity uses the expected value method and determines that the estimated amount of variable consideration is not a possible outcome in the individual contract, the entity must still consider the constraint on variable consideration. Depending on the facts and circumstances of each contract, an entity may need to constrain its estimate of variable consideration, even though it has used an expected value method, if the factors in IFRS 15.57 ver, using indicate a likelihood of a significant revenue reversal. Howe the expected value method and considering probability - weighted amounts 175 Portfolio Pract ical Expedient and Application of Variable no. 38, TRG Agenda paper dated 13 July 2015. Consideration Constraint, A closer look at IFRS 15, the revenue recognition standard Updated October 2018 169

170 sometimes achieves the objective of the constraint on variable consideration. When an entity estimates the transaction price using the expected value ces the probability of a revenue reversal because method, the entity redu the estimate does not include all of the potential consideration due to the probability weighting of the outcomes. In some cases, the entity may not need to constrain the estimate of variable consideration if the factors in IFRS 15.57 do not indicate a likelihood of a significant revenue reversal. section 6 for a discussion of allocating the transaction price. See we see it How he constraint is a new way of evaluating variable consideration Applying t and it applies to all types of variable consideration that must be estimated in all transactions. from ed legacy What’s chang IFRS? For a number of entities, the treatment of variable consideration under the standard could represent a significant change from pr evious practice. Under legacy IFRS, preparers often defer red measurement of variable consideration until revenue reliably measurable, which could be when was the uncertainty is removed or when payment is received. recognition of contingent consideration, legacy IFRS permit ted Furthermore, probable that the economic benefits associated with the but only if it was flow to the entity and the amount of revenue be reliably could transaction would 176 measured. Some entities, therefore, defer red recognition until the was contingency resolved. Some entities ha d looked to US GAAP to develop their accounting policies in this area. Legacy US GAAP ha d various requirements and thresholds for recognising variable consideration. As a result, the accounting treatmen t varie d depending on which US GAAP standard was applied to a transaction. For example, the revenue recognition requirements in ASC 605 - 25 limit ed the recognition of contingent consideration when the amounts depend ed tity and SAB Topic 13 require that the on the future performance of the en d 177 transaction price be fixed or determinable in order to recognise revenue. In contrast, the constraint on variable consideration in the standard is an entirely new way of evaluating variable consideration and is ap plicable to all types of variable consideration in all transactions. As a result, depending on the requirements entities were previously applying, some entities may recognise revenue sooner under the standard, while others may recognise revenue later. 176 IAS 18.14, IAS 18.18 and IAS 11.11. 177 Revenue 25 and SEC Staff Accounting Bulletin Topic 13: As discussed in ASC 605 - Recognition. Updated October 2018 170 A closer look at IFRS 15, the revenue recognition standard

171 Frequently asked questions - 10 Question 5 : Is the constraint on variable consideration applied at the – contract or performance obligation level? [TRG meeting 26 January 2015 Agenda paper no. 14] TRG members generally agreed that the constraint would be applied at the contract level and not at the performance obligation level. That is, the significance assessment of the potential revenue reversal would consider the total transaction price of the contract (and not the portion of transaction price allocated to a performance obligation). Stakeholders raised this question because the standard refers to ‘cumulative revenue recognised’ without specifying the level at which this assessment would be perfo rmed (i.e., at the contract level or performance obligation level). Furthermore, the Basis for Conclusions could be read to indicate that the assessment should occur in relation to the cumulative revenue recognised 178 for a performance obligation. 5 - 11 Question - step approach to : Would an entity be required to follow a two estimate variable consideration (i.e., first estimate the variable consideration and then apply the constraint to that estimate)? No. The Board noted in the Basis for Conclusions that an e ntity is not required to strictly follow a two step process (i.e., first estimate the variable - consideration and then apply the constraint to that estimate) if its internal 179 processes incorporate the principles of both steps in a single step. For example, if an entity already has a single process to estimate expected returns when calculating revenue from the sale of goods in a manner consistent with the objectives of applying the constraint, the entity would on price and then separately apply the not need to estimate the transacti constraint. A TRG agenda paper also noted that applying the expected value method, which requires an entity to consider probability - weighted amounts, may sometimes achieve the objective of the constraint on variable 180 That is, in developing its estimate of the transaction consideration. price in accordance with the expected value method, an entity reduces the probability of a revenue reversal and may not need to further constrain its estimate of variable considerati on. However, to meet the objective of the constraint, the entity’s estimated transaction price would need to incorporate its expectations of the possible consideration amounts (e.g., products not expected to be returned) at a level at which it is highly pr obable that including the estimate of variable consideration in the transaction price would not result in a significant revenue reversal (e.g., such that it is highly probable that additional returns above the estimated amount would not result in a signif icant reversal). 178 IFRS 15.BC217. 179 IFRS 15.BC215. 180 Portfolio Practical Expedient and Application of Variable TRG Agenda paper no. 38, , dated Consideration Constraint 13 July 2015. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 171

172 5.2.4 Reassessment of variable consideration s to update When a contract includes variable consideration, an entity need its estimate of the transaction price throughout the term of the contract to of each reporting period. This involve s depict conditions that exist at the end updating the estimate of the variable consideration (including any amounts that are constrained) to reflect an entity’s revised expectations about the amount of consideration to which it expects to be entitled, consi dering uncertainties that are resolved or new information that is gained about remaining uncertainties. As discussed in 5.2.3, conclusions about amounts that may result in a significant revenue reversal may change as an entity satisfies a performance oblig ation. See s ection 6.5 for a discussion of allocating changes in the transaction price after contract inception. 5.3 Refund liabilities An entity may receive consideration that it will need to refund to the customer in the future because the consideration is not an amount to which the entity ultimately will be entitled under the contract. These amounts received (or receivable) need s to be recorded as refund liabilities. A refund liability is measured at the amount the entity ultimately expects it will have to return to the customer and such amount is not included in the transaction price. An entity is required to update its estimates of refund liabilities (and the corresponding change in the transaction price) at the end of each reporting period. While the most common form of refund liabilities may be related to sales with a right of return s ection 5.4.1) , the refund liability requirements also apply (see when an entity expects that it will need to refund consideration received due to poor custom er satisfaction with a service provided (i.e., there was no good delivered or returned) and/or if an entity expects to have to provide retrospective price reductions to a customer (e.g., if a customer reaches a certain threshold of purchases, the unit pri ce is retrospectively adjusted). Frequently asked questions Question 5 - 12 : Is a refund liability a contract liability (and, thus , subject to the presentation and disclosure requirements of a contract liability)? s See response to Question 10 4 in - 10.1. ection Updated October 2018 172 A closer look at IFRS 15, the revenue recognition standard

173 5.4 Rights of return The standard notes that, in some contracts, an entity may transfer control of a product to a customer, but grant the customer the right to return. In return, the customer may receive a full or partial refund of any consideration paid; a credit that can be applied against amounts owed, or that will be owed, to 181 As the entity; another p roduct in exchange; or any combination thereof. s ection 4.7, the standard states that a right of return does not discussed in represent a separate performance obligation. Instead, a right of return affects the transaction price and the amount of revenu e an entity can recognise for satisfied performance obligations. In other words, rights of return create variability in the transaction price. nder IFRS 15, rights of return do not include exchanges by customers of one U product for another of the same type, quality, condition and price (e.g., one colour or size for another). Nor do rights of return include situations where a customer may return a defective product in exchange for a functioning product; these are, instead, evaluated in accordance with th e application guidance on s ection 9.1). warranties (see The standard provides the following application guidance to determine how rights of return would be treated: Extract from IFRS 15 B21. To account for the transfer of products with a right of return ( and for some services that are provided subject to a refund), an entity shall recognise all of the following: (a) r evenue for the transferred products in the amount of consideration to which the entity expects to be entitled (therefore, revenue would not be recognised for the products expected to be returned); (b) a refund liability; and n asset (and corresponding adjustment to cost of sales) for its right to (c) a recover products from customers on settling the refund liability. entity estimate s Under the standard, an the transaction price and appl ies the constraint to the estimated transaction price to determine the amount of consideration to which the entity expects to be entitled . In doing so, it consider s the products expected to be returned in o rder to determine the amount to which the entity expects to be entitled (excluding consideration for the products expected to be returned). The entity recognise s revenue based on the amount to which it expects to be entitled through to the end of the retur n An entity period (considering expected product returns). does not recognise the portion of the revenue subject to the constraint until the amount is no longer constrained, which could be at the end of the return period. The entity received or receivable that is expected to be returned the amount recognise s as a refund liability, representing its obligation to return the customer’s consideration (see s ection 5.3). Subsequently, at the end of each reporting period, the entity updates its assessment of amounts for which it expects to be entitled. As part of updating its estimate, an entity must update its assessment of expected returns and the related refund liabilit ies. This remeasurement is performed at the end of each reporting period and reflects any changes in assumptions about expected returns. Any adjustments made to the estimate result in a corresponding adjustment to amounts recognised as revenue for 181 IFRS 15.B20. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 173

174 the sa if the entity expects the number tisfied performance obligations (e.g., of returns to be lower than originally estimated, it would have to increase the amount of revenue recognised and decrease the refund liability). Finally, when customers exercise thei r rights of return, the entity may receive the returned product in a saleable or repairable condition. Under the standard, at the time of the initial sale (i.e., when recognition of revenue is deferred due to the anticipated return), the entity recognises a return asset (and adjusts the cost of goods sold) for its right to recover the goods returned by the customer. The entity initially measures this asset at the former carrying amount of the inventory, less any expected costs to recover the goods, includin g any potential decreases in the value of the returned goods. Along with remeasuring the refund liability at the end of each reporting period, the entity updates the measurement of the asset recorded for any revisions to its expected level of returns, as well as any additional decreases in the value of the returned products. IFRS 15 requires the carrying value of the return asset to be presented separately from inventory and to be subject to impairment testing on its own, . The standard also requires the refund separately from inventory on hand liability to be presented separately from the corresponding asset (on a gross basis, rather than a net basis). The standard provides the following example of rights of return: Extract from IFRS 15 Example 22 — Right of return (IFRS 15.IE110 - IE115) An entity enters into 100 contracts with customers. Each contract includes the sale of one product for CU100 (100 total products × CU100 = CU10,000 total consideration). Cash is received when control of a product transfers. The entity’s customary business practice is to allow a customer to return any unused product within 30 days and receive a full refund. The entity’s cost of each product is CU60. The entity applies the requirements in IFRS 15 to the portfolio of 100 contracts because it reasonably expects that, in accordance with paragraph 4, the effects on the financial statements from applying these requirements to the portfolio would not differ materially from applying the requirements to the individual contracts within the portfolio. Because the contract allows a customer to return the products, the consideration received from the customer is variable. To estimate the variable which the entity will be entitled, the entity decides to use consideration to the expected value method (see paragraph 53(a) of IFRS 15) because it is the method that the entity expects to better predict the amount of consideration expected value method, the entity to which it will be entitled. Using the estimates that 97 products will not be returned. Updated October 2018 174 A closer look at IFRS 15, the revenue recognition standard

175 Extract from IFRS 15 (cont’d) – The entity also considers the requirements in paragraphs 56 58 of IFRS 15 on constraining estimates of variable consideration to determine whether the estimated amount of variable consideration of CU9,700 (CU100 × 97 products not expected to be returned) can be included in the transaction price. The entity considers the factors in paragraph 57 of IFRS 15 and determines that although the returns are outside the entity’s influence, it has significant experience in estimating returns for this product and customer class. In addition, the uncertainty will be resolved within a short t ime frame (ie the 30 day return period). Thus, the entity concludes that it is highly probable - that a significant reversal in the cumulative amo unt of revenue recognised (ie CU9,700) will not occur as the uncertainty is resolved (ie over the return peri od). The entity estimates that the costs of recovering the products will be immaterial and expects that the returned products can be resold at a profit. Upon transfer of control of the 100 products, the entity does not recognise revenue for the three products that it expects to be returned. Consequently, in accordance with paragraphs 55 and B21 of IFRS 15, the entity recognises the following: (a) r evenue of C U9,700 (CU100 × 97 products not expected to be returned); (b) a refund liability of CU300 (CU100 refund × 3 products expected to be returned); and (c) a n asset of CU180 (CU60 × 3 products for its right to recover products from customers on settling the refund li ability). IFRS? What’s chang ed from legacy While IFRS 15’s accounting treatment for rights of return may not significantly change practice , there are some notable differences. Under from legacy IFRS s IFRS the transaction price and apply the constraint to 15, an entity estimate s the products expected the estimated transaction price. In doing so, it consider to be returned in order to determine the amount to which the entity expects to be entitled (excluding the products expected to be returned). Consistent with IAS 18.17, IFRS 15 requires an entity to recognise the amount of expected returns as a refund liability, representing its obligation to return the customer’s consideration. If the entity estimates returns and applies the constraint, the portion of the revenue that is subject to the constraint is not recognised until the amounts are no longer constrained, which could be at the end of the return period. The classification in the statement of financial position for amounts r elated previous practice. Under to the right of return asset may be a change from IFRS, an entity typically recognise d a liability and corresponding legacy expense, but may not have recognise d a return asset for the inventory that may be returned, as is 15 is clear that required by IFRS 15. In addition, IFRS the carrying value of the return asset (i.e., the product expected to be returned) is subject to impairment testing on its own, separate ly from the inventory on d liability to be presented separately 15 also requires the refun hand. IFRS from the corresponding asset (on a gross basis, rather than a net basis). A closer look at IFRS 15, the revenue recognition standard Updated October 2018 175

176 How we see it The topic of product sales with rights of return is one that has not received as much attention as other topics for a variety of reasons. However, the changes in this area (primarily treating the right of return as a type of variable consideration to which the variable consideration requirements apply, including the constraint) may affect manufacturers and retailers that, otherwis e, would not be significantly affected by IFRS 15. Entities need to assess whether their previous methods for estimating returns are appropriate, given the need to consider the constraint. Frequently asked questions Question 5 - 1 3 : Is an entity applying the portfolio approach practical expedient when accounting for rights of return? [TRG meeting 13 July 2015 – Agenda paper no. 38] An entity can, but would not be required to, apply the portfolio approach practical expedient to estimate variable considerati on for expected returns ection 5.2.2 on s using the expected value method. Similar to the discussion in estimating variable consideration, the TRG agenda paper noted that an entity can consider evidence from other, similar contracts to develop an estimate of variable consideration using the expected value method without applying the portfolio approach practical expedient. In order to estimate variable consideration in a contract, an entity frequently make s judgements ith other, similar contracts. Considering considering its historical experience w historical experience does not necessarily mean the entity is applying the portfolio approach practical expedient. This question arises, in part, because Example 22 from the standard (in that the entity is using the portfolio approach the extract above) states practical expedient in IFRS 15.4 to calculate its estimate of returns. Use of this practical expedient requires an entity to assert that it does not expect applying the standard to the use of the expedient to differ materially from an individual contract. We expect that entities often use the expected value method to estimate variable consideration related to returns because doing so would likely better predict the amount of consideration to which the entities will be entitled. This is despite the fact that there are two potential outcomes for each contract from the variability of product returns: the product either will be returned or will not be returned. That is, the revenue for each contract ultimately either will be 100% or will be 0% of the total contr act value (assuming returns However, entities may conclude create the only variability in the contract). that the expected value is the appropriate method for estimating variable consideration because they have a large number of contracts with similar racteristics. The TRG agenda paper noted that using a portfolio of data is cha not equivalent to using the portfolio approach practical expedient, so entities that use the expected value method to estimate variable consideration for returns would not be requir ed to assert that the outcome from the portfolio is not expected to materially differ from an assessment of individual contracts. Updated October 2018 176 A closer look at IFRS 15, the revenue recognition standard

177 Frequently asked questions (cont’d) - 4 : How should an entity account for restocking fees for goods Question 5 1 expected to be returned? [TRG meeting 13 July 2015 – Agenda that are paper no. 35] Entities sometimes charge customers a ‘restocking fee’ when a product is returned. This fee may be levied by entities to compensate them for the costs of repackaging, shipping and/or reselling the item at a lower price to another customer. Stakeholders had raised questions about how to account for restocking fees and related costs. TRG members generally agreed that restocking fees for goods that are cluded in the estimate of the transaction expected to be returned would be in price at contract inception and recorded as revenue when (or as) control of the good transfers. For example, assume that an entity enters into a contract with a customer to sell 10 widgets for CU100 each. The cust omer has the right to return the widgets, but, if it does so, it will be charged a 10% restocking fee (or CU10 per returned widget). The entity estimates that 10% of all widgets that are sold will be returned. Upon transfer of control of the 10 widgets, t he entity will recognise revenue of CU910 [(9 widgets not expected to be returned x CU100 selling price) + (1 widget expected to be returned x CU10 restocking fee)]. A refund liability of CU90 will also be recorded [1 widget expected to - be returned x (CU1 00 selling price CU10 restocking fee)]. Question 5 - 5 : How should an entity account for restocking costs related 1 to expected returns (e.g., shipping or repackaging costs)? [TRG meeting – Agenda paper no. 35] 13 July 2015 TRG members generally agreed that restocking costs (e.g., shipping and repackaging costs) would be recorded as a reduction of the amount of the return asset when (or as) control of the good transfers. This accounting treatment is consistent with the revenu e standard’s requirement that the return asset be initially measured at the former carrying amount of the inventory, less any expected costs to recover the goods (e.g., restocking costs). Question 5 - 1 6 : When an entity has a conditional call option to remov e and replace expired products (e.g., out - of - date perishable goods, expired medicine), does the customer obtain control of the products (or is it akin to a right of return)? 1 ection 7.3. s . in See response to Question 7 - 20 A closer look at IFRS 15, the revenue recognition standard Updated October 2018 177

178 5.5 Significant financing component October 2018) (updated For some transactions, the receipt of the consideration does not match the timing of the transfer of goods or services to the customer (e.g., the consideration is prepaid or is paid after the services are provided). When the customer pays in arrears, the entity is effectively providing financing to the customer. Conversely, when the customer pays in advance, the entity has effectively received financing from the customer. gnificant financing component IFRS 15 states the following in relation to a si in a contract: Extract from IFRS 15 60. In determining the transaction price, an entity shall adjust the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract (either explicitly or implicitly) provides the customer or the entity with a significant benefit of financing the transfer of goods or services to the customer. In those circumstances, the contract contains a significant financing component. A significant financing component may exist regardless of whether the promise of financing is explicitly stated in the contract or implied by the payment terms agreed to by the parties to the contract. 61. The objective when adjusting the promised amount of consideration for a significant financing component is for an entity to recognise revenue at an amount that reflects the price that a customer would have paid for the promised goods or services if the customer had paid cash for those goods or selling price). services when (or as) they transfer to the customer (ie the cash An entity shall consider all relevant facts and circumstances in assessing whether a contract contains a financing component and whether that financing component is significant to the contract, including both of the following: (a) t he difference, if any, between the amount of promised consideration and the cash selling price of the promised goods or services; and (b) t he combined effect of both of the following: (i) t he expected length of time between when the entity transfers the promised good s or services to the customer and when the customer pays for those goods or services; and (ii) t he prevailing interest rates in the relevant market. 62. Notwithstanding the assessment in paragraph 61, a contract with a ncing component if any of the customer would not have a significant fina following factors exist: (a) t he customer paid for the goods or services in advance and the timing of the transfer of those goods or services is at the discretion of the customer. (b) a substantial amount of the consideration promised by the customer is variable and the amount or timing of that consideration varies on the basis occurrence of a future event that is not - of the occurrence or non substantially within the control of the customer or the entity (for example, based royalty). - ion is a sales if the considerat Updated October 2018 178 A closer look at IFRS 15, the revenue recognition standard

179 Extract from IFRS 15 (cont’d) t difference between the promised consideration and the cash selling (c) he price of the good or service (as described in paragraph 61) arises for reasons other than the provision of finance to either the customer or the entity, and the difference between those amounts is proportional to the reason for the difference. For example, the payment terms might provide the entity or the customer with protection from the other party failing to complete some or all of its obligations under the contract. adequately 63. As a practical expedient, an entity need not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. 64. To meet the objective in paragraph 61 when adjusting the promised amount of conside ration for a significant financing component, an entity shall use the discount rate that would be reflected in a separate financing transaction between the entity and its customer at contract inception. That rate would reflect the credit characteristics of the party receiving financing in the contract, as well as any collateral or security provided by the customer or the entity, including assets transferred in the contract. An entity may be able to determine that rate by identifying the rate that discounts the nominal amount of the promised consideration to the price that the customer would pay in cash for the goods or services when (or as) they transfer to the customer. After contract inception, an entity shall not update the discount rate for changes in interest rates or other circumstances (such as a change in the assessment of the customer's credit risk). The Board explained in the Basis for Conclusions that, conceptually, a contract that includes a financing component is comprise d of two transactions — one for 182 the financing. the sale of goods and/or services and one for Accordingly, the Board decided to only require entities to adjust the amount of promised consideration for the effects of financing if the timing of payments specified t benefit in the contract provides the customer or the entity with a significan of financing. The IASB’s objective in requiring entities to adjust the promised amount of consideration for the effects of a significant financing component is for entities to recognise as revenue the ‘cash selling price’ of the underlying 183 s or services at the time of transfer. good However, an entity is not required to adjust the promised amount of consideration for the effects of a significant financing component if the entity expects, at contract inception, that the period between when the en tity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. The Board added this practical expedient to the standard because it simplifies the application of this aspect of IFRS 15 and because the effect of accounting for a significant financing component (or of not doing so) should be limited in financing 184 arrangements with a duration of less than 12 months. If an entity uses this practical expedient, it would apply the expedient c onsistently to similar 185 contracts in similar circumstances . It is important to note that if the period between when the entity transfers a promised good or service to a customer and the customer pays for that good 182 IFRS 15.BC229. 183 IFRS 15.BC230. 184 IFRS 15.BC236. 185 IFRS 15.BC235. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 179

180 or service is more than one year and the financing component is deemed to be significant, the entity must account for the financing component. That entire months 12 is, an entity cannot exclude the first of the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service from the calculation of the potential . An entity also cannot exclude the first 12 adjustment to the transaction price ncing component of a contract months in its determination of whether the fina is significant. Entities may need to apply judgement to determine whether the practical expedient applies to some contracts. For example, the standard does not specify whether entities should assess the period between payment and performance at the contract level or at the performance obligation level. In addition, the TRG discussed how an entity should consider whether the practical expedient applies to contracts with a single payment stream for multiple ns. See Question 5 - 20 performance obligatio below. Absent the use of the practical expedient, to determine whether a significant financing component exists, an entity need s to consider all relevant facts and circumstances, including: (1) The difference between the cash selling pr ice and the amount of promised consideration for the promised goods or services. And (2) The combined effect of the expected length of time between the transfer of the goods or services and the receipt of consideration and the prevailing market interest rates. The Board acknowledged that a difference in the timing between the transfer of and payment for goods or services is not ct of timing and the prevailing interest determinative, but the combined effe rates may provide a strong indication that an entity is providing or receiving 186 a significant benefit of financing. Even if conditions in a contract would otherwise indicate that a significant financing component ex ists, the standard includes several situations that the Board has determined do not provide the customer or the entity with a significant benefit of financing. These situations, as described in IFRS 15.62, include the following: • The customer has paid for the goods or services in advance and the timing of the transfer of those goods or services is at the discretion of the customer. In these situations (e.g., prepaid phone cards, customer loyalty programmes), the Board noted in th e Basis for Conclusions that the payment terms are not related to a financing arrangement between the parties and the costs of requiring an entity to account for a significant financing component would outweigh the benefits because an entity would o continually estimate when the goods or services will transfer to need t 187 the customer. • A substantial amount of the consideration promised by the customer is variable and is based on factors outside the control of the customer or entity. In these situations, t he Board noted in the Basis for Conclusions that the primary purpose of the timing or terms of payment may be to allow for the resolution of uncertainties that relate to the consideration, rather than to provide the customer or the entity with the signi ficant benefit of financing. In addition, the terms or timing of payment in these situations may be to provide the parties with assurance of the value of the goods or 186 IFRS 15.BC232. 187 15.BC233. IFRS Updated October 2018 180 A closer look at IFRS 15, the revenue recognition standard

181 services (e.g., an arrangement for which consideration is in the form of a 188 based ro yalty). sales - The difference between the promised consideration and the cash selling • price of the good or service arises for reasons other than the provision of financing to either the customer or the entity (e.g., a payment is made in advance or in arrears in accordance with the typical payment terms of the industry or jurisdiction). In certain situations, the Board determined the purpose of the payment terms may be to provide the customer with assurance that the entity will complete its obligations under the contract, rather than to provide financing to the customer or the entity. Examples include a customer withholding a portion of the consideration until the contract is complete (illustrated in Example 27 below) or a milestone is reached, or an entity requ iring a customer to pay a portion of the consideration upfront in order to secure a future supply of goods or services. See Question 5 - 1 7 for further discussion. As explained in the Basis for Conclusions, the Board decided not to provide an on from accounting for the effects of a significant financing overall exempti component arising from advance payments. This is because ignoring the effects of advance payments may skew the amount and timing of revenue recognised if the advance payment is significant and t he purpose of the payment is to provide 189 For example, an entity may require a customer to the entity with financing. make advance payments in order to avoid obtaining the financing from a third party. If the entity obtained third - party financing, it would likely charge the customer additional amounts in order to cover the finance costs incurred. The Board decided that an entity’s revenue should be consistent regardless of whether it receives the significant financing benefit from a customer or from d party because, in either scenario, the entity’s performance is the same. a thir In order to conclude that an advance payment does not represent a significant financing component, we believe that an entity need s to support why the de a significant financing benefit and describe advance payment does not provi 190 its substantive business purpose. As a result, it is important that entities analyse all of the relevant facts and circumstances. Example 29 below illustrates an entity’s determination that a customer’s adva nce payment represents a significant financing component. Example 30 illustrates an entity’s determination that a customer’s advance payment does not represent a significant financing component. The assessment of significance is made at the individual con tract level. As noted in the Basis for Conclusions, the Board decided that it would be an undue burden to require an entity to account for a financing component if the effects of the financing component are not significant to the individual contract, but the combined effects of the financing components for a portfolio of similar 191 contracts would be material to the entity as a whole. When an entity concludes that a financing component is significant to a contract, in accordance with IFRS 15.64, it determin es the transaction price by applying an interest rate to the amount of promised consideration. The entity uses the same interest rate that it would use if it were to enter into a separate financing transaction with the customer at contract inception . The i nterest rate needs to reflect the credit characteristics of the borrower in the contract, which could be 188 IFRS 15.BC233. 189 IFRS 15.BC238. 190 Consistent with the discussions within TRG Agenda paper no. 30, Significant Financing 30 March 2015. , dated Components 191 IFRS 15.BC234. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 181

182 the entity or the customer, depending on who receives the financing. Using the risk free rate or a rate explicitly stated in the contract that does not correspond - 192 While not explicitly with a separate financing rate would not be acceptable. stated in the standard, we believe an entity would consider the expected term of the financing when determining the interest rate in light of current market ns at contract inception. In addition, IFRS 15.64 is clear that an entity conditio does not update the interest rate for changes in circumstances or market interest rates after contract inception. How we see it The standard requires that the interest rate be a rate similar to what the entity would have used in a separate financing transaction with the customer. Because most entities are not in the business of entering into free - standing financing arrangements with their customers, they may find it difficult to ide ntify an appropriate rate. However, most entities perform some level of credit analysis before financing purchases for a customer, so they likely have some information about the customer’s credit risk. For entities that have different pricing for products depending on the time of payment (e.g., cash discounts), the standard indicates that the appropriate interest rate, in some cases, could be determined by identifying the rate that discounts the nominal amount of the promised consideration to the cash sale s price of the good or service. Entities likely have to exercise significant judgement to determine whether a significant financing component exists when there is more than one year of goods or services and the receipt of contract transfer between the con sideration. Entities should consider sufficiently documenting their analyses to support their conclusions. 5.5.1 Examples (updated October 2018) The standard includes several examples to illustrate these concepts. Example 26 illustrates a contract that contains a significant financing component because the cash selling price differs from the promised amount of consideration and there are no other factors present that would indicate that this difference arises for reasons other than financing. In this example, the contract also contains an implicit interest rate that is determined to be ate financing commensurate with the rate that would be reflected in a separ transaction between the entity and its customer at contract inception, as follows: Extract from IFRS 15 — Example 26 Significant financing component and right of return (IFRS 15.IE135 - IE140) An entity sells a product to a customer for CU121 that is payable 24 months after delivery. The customer obtains control of the product at contract inception. The contract permits the customer to return the product within 90 days. The product is new and t he entity has no relevant historical evidence of product returns or other available market evidence. 192 IFRS 15.BC239. Updated October 2018 182 A closer look at IFRS 15, the revenue recognition standard

183 Extract from IFRS 15 (cont’d) The cash selling price of the product is CU100, which represents the amount the same product sold under that the customer would pay upon delivery for otherwise identical terms and conditions as at contract inception. The entity’s cost of the product is CU80. The entity does not recognise revenue when control of the product transfers nce of the right of return and the to the customer. This is because the existe lack of relevant historical evidence means that the entity cannot conclude that it is highly probable that a significant reversal in the amount of cumulative 56 – 58 of revenue recognised will not occur in accordance with paragraphs IFRS 15. Consequently, revenue is recognised after three months when the right of return lapses. The contract includes a significant financing component, in accordance with paragraphs 60 – 62 of IFRS 15. This is evident from the difference between the amount of promised consideration of CU121 and the cash selling price of CU100 at the date that the goods are transferred to the customer. The contract includes an implicit interest rate of 10 per cent (ie the interest rate that over 24 months discount s the promised consideration of CU121 to the cash selling price of CU100). The entity evaluates the rate and concludes that it is commensurate with the rate that would be reflected in a separate financing transaction between the entity and its customer at contract inception. The following journal entries illustrate how the entity accounts for this contract in accordance with paragraphs B20 – B27 of IFRS 15. (a) When the product is transferred to the customer, in accordance with paragraph B21 of IFRS 15: Asset fo r right to recover product to (a) be returned CU80 CU80 Inventory This example does not consider expected costs to recover the asset . (a) During the three - (b) month right of return period, no interest is recognised in accordance with paragraph 65 of IFRS 15 because no contract asset or receivable has been recognised. (c) When the right of return lapses (the product is not returned): (a) Receivable CU100 Revenue CU100 Cost of sales CU80 Asset for product to be returned CU80 (a) The receivable recognised would be measured in accordance with IFRS 9. This example assumes there is no material difference between the fair value of the receivable at contract inception and the fair value of the receivable when it is e the right of return lapses. In addition, this example does recognised at the tim not consider the impairment accounting for the receivable. Until the entity receives the cash payment from the customer, interest determining the revenue would be recognised in accordance with IFRS 9. In effective interest rate in accordance with IFRS 9, the entity would consider the remaining contractual term. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 183

184 Example 26 also illustrates the requirement in IFRS 15.65 which provides , that i nterest income or interest expense is recognis ed only to the extent that a in accounting contract asset ( contract liability is recognis ed or receivable) or a for a contract with a customer. See further discussion in section 5.5.2. n Example 27, the difference between the promised consideration and the c I ash selling price of the good or service arises for reasons other than the provision of financing. In this example, the customer withholds a portion of each payment until the contract is complete in order to protect itself from the entity failing to compl ete its obligations under the contract, as follows: Extract from IFRS 15 Example 27 — Withheld payments on a long - term contract (IFRS 15.IE141 - IE142) An entity enters into a contract for the construction of a building that includes scheduled milestone payments for the performance by the entity throughout the contract term of three years. The performance obligation will be satisfied over time and the mi lestone payments are scheduled to coincide with the entity's expected performance. The contract provides that a specified percentage of each milestone payment is to be withheld (ie y retained) by the customer throughout the arrangement and paid to the entit only when the building is complete. The entity concludes that the contract does not include a significant financing component. The milestone payments coincide with the entity's performance and the contract requires amounts to be retained for reasons othe r than the provision of finance in accordance with paragraph 62(c) of IFRS 15. The withholding of a specified percentage of each milestone payment is intended to protect the customer from the contractor failing to adequately complete its obligations under the contract. Example 28 illustrates two situations. In one, a contractual discount rate reflects the rate in a separate financing transaction. In the other, it does not. Extract from IFRS 15 — Example 28 IE147) - Determining the discount rate (IFRS 15.IE143 An entity enters into a contract with a customer to sell equipment. Control of the equipment transfers to the customer when the contract is signed. The price stated in the contract is CU1 million plus a five per cent contractual rate of in terest, payable in 60 monthly instalments of CU18,871. Case A Contractual discount rate reflects the rate in a separate financing — transaction In evaluating the discount rate in the contract that contains a significant financing component, the entity observ es that the five per cent contractual rate of interest reflects the rate that would be used in a separate financing transaction between the entity and its customer at contract inception (ie the dit characteristics contractual rate of interest of five per cent reflects the cre of the customer). The market terms of the financing mean that the cash selling price of the equipment is CU1 million. This amount is recognised as revenue and as . a loan receivable when control of the equipment transfers to the customer The entity accounts for the receiv able in accordance with IFRS 9. Updated October 2018 184 A closer look at IFRS 15, the revenue recognition standard

185 Extract from IFRS 15 (cont’d) — Case B Contractual discount rate does not reflect the rate in a separate financing transaction evaluating the discount rate in the contract that contains In a significant financing component, the entity observes that the five per cent contractual rate of interest is significantly lower than the 12 per cent interest rate that would be used in a separate financing transaction between the entity and its custome r at contract inception (ie the contractual rate of interest of five per cent does not reflect the credit characteristics of the customer). This suggests that the cash selling price is less than CU1 million. In accordance with paragraph 64 of IFRS 15, the entity determines the transaction price by adjusting the promised amount of consideration to reflect the contractual payments using the 12 per cent interest rate that reflects the credit characteristics of th e customer. Consequently, the entity determines that the transaction price is CU848,357 (60 monthly payments of CU18,871 discounted at 12 per cent). The entity recognises revenue and a loan receivable for that amount. The entity accounts for the loan rec eivable in accordance with IFRS 9. Example 29 illustrates a contract with an advance payment from the customer that the entity concludes represents a significant benefit of financing. It also illustrates a situation in which the implicit interest rate doe s not reflect the interest rate that would be used in a separate financing transaction between the entity and its customer at contract inception, as follows: Extract from IFRS 15 Example 29 — Advance payment and assessment of discount rate (IFRS 15.IE148 - IE151) An entity enters into a contract with a customer to sell an asset. Control of the asset will transfer to the customer in two years (ie the performance obligation will be satisfied at a point in time). The contract includes two alternative payment options: payment of CU5,000 in two years when the customer obtains control of the as set or payment of CU4,000 when the contract is signed. The customer elects to pay CU4,000 when the contract is signed. The entity concludes that the contract contains a significant financing component because of the length of time between when the custome r pays for the asset and when the entity transfers the asset to the customer, as well as the prevailing interest rates in the market. The interest rate implicit in the transaction is 11.8 per cent, which is ernative payment options the interest rate necessary to make the two alt economically equivalent. However, the entity determines that, in accordance with paragraph 64 of IFRS 15, the rate to be used in adjusting the promised . consideration is six per cent, which is the entity's incremental borrowing rate A closer look at IFRS 15, the revenue recognition standard Updated October 2018 185

186 Extract from IFRS 15 (cont’d) The following journal entries illustrate how the entity would account for the significant financing component: (1) recognise a contract liability for the CU4,000 payment received at contract inception: CU4,000 Cash Contract liability CU4,000 (2) during the two years from contract inception until the transfer of the asset, the entity adjusts the promised amount of consideration (in accordance with paragraph 65 of IFRS 15) and accretes the contract liability by recognising interest on CU4,000 at six per cent for two years: (a) Interest expense CU494 Contract liability CU494 (a) CU494 = CU4,000 contract liability × (6 per cent interest per year for two years). (3) recognise revenue for the transfer of the asset: Contract liability CU4,494 CU4,494 Revenue In Example 30, involving a contract with an advance payment from the customer, the entity determines that a significant financing component does not exist because the difference between the amount of promised consideration and the cash selling price of the good or service arises for reasons other than the provision of financing, as follows: Extract from IFRS 15 Example 30 — Advance payment (IFRS 15.IE152 - IE154) An entity, a technology product manufacturer, enters into a contract with a customer to provide global telephone technology support and repair coverage for three years along with its technology product. The customer purchases this support service at the time of buying the product. Consideration for the service is an additional CU300. Customers electing to buy this service must pay for it upfront (ie a monthly payment option is not available). To determine whether there is a significant financing component in the contract, the entity considers the nature of the service being offered and the purpose of the payment terms. The entity charges a single upfront amount, not with the primary purpose of obtaining financing from the customer but, instead, to maximise profitability, taking into consideration the risks associated with providing the service. Specifically, if customers could pay monthly, they would be less likely to renew and the population of customers that continue to use the support service in the later years may become smaller and less diverse over time (ie customers that choose to renew historically are those that make greater use of the service, thereby . In addition, customers tend to use services increasing the entity's costs) more if they pay monthly rather than making an upfront payment. Finally, the entity would incur higher administration costs such as the costs related collection of monthly paymen to administering renewals and ts. Updated October 2018 186 A closer look at IFRS 15, the revenue recognition standard

187 Extract from IFRS 15 (cont’d) In assessing the requirements in paragraph 62(c) of IFRS 15, the entity determines that the payment terms were structured primarily for reasons other than the provision of finance to the entity. The entity charges a single upfront amount for the services b ecause other payment terms (such as a monthly payment plan) would affect the nature of the risks assumed by the entity to provide the service and may make it uneconomical to provide the service. As a result of its analysis, the entity concludes that ther e is not a significant financing component. Frequently asked questions Question 5 - 1 7 : The standard states that a significant financing component does not exist if the difference between the promised consideration and the cash selling price of the good or service arises for reasons other than the provision of finance. How broadly would this factor be applied? [TRG meeting 30 March 2015 – Agenda paper no. 30] According to IFRS 15, a significant financing component does not exist if the difference between the promised consideration and the cash selling price of 193 the good or service arises for reasons other than the provision of finance. TRG members discussed how broadly this factor would be applied. TRG members generally agreed that there is likely signifi cant judgement involved in determining whether either party is providing financing or the payment terms are for another reason. TRG members also generally agreed that the Board did not seem to intend to create a presumption that omponent exists if the cash selling price differs from a significant financing c the promised consideration. The TRG agenda paper noted that, although IFRS 15.61 states that the measurement objective for a significant financing component is to recognise or se rvices at an amount that reflects the cash selling revenue for the goods price, this measurement objective is only followed when an entity has already determined that a significant financing component exists. The fact that there is a difference in the promised consideration and the cash selling price is not a principle for determining whether a significant financing component actually exists. It is only one factor to consider. Many TRG members noted that it require s significant judgement in some circumstances to determine whether a transaction includes a significant financing component. Question 5 - 1 8 : If the promised consideration is equal to the cash selling price, does a financing component exist? [TRG meeting 30 M arch 2015 – Agenda paper no. 30] TRG members generally agreed that even if the list price, cash selling price and promised consideration of a good or service are all equal, an entity should not automatically assume that a significant financing component d oes not exist. This would be a factor to consider, but it would not be determinative. 193 IFRS 15.62(c). A closer look at IFRS 15, the revenue recognition standard Updated October 2018 187

188 Frequently asked questions (cont’d) As discussed above in Question 5 - 1 7 , while IFRS 15.61 states that the measurement objective for a significant financing component is to recognise revenue for the goods or services at an amount that reflects the cash selling price, this measurement objective is only followed when an entity has alrea dy determined that a significant financing component exists. The fact that there is no difference between the promised consideration and the cash selling price is not determinative in the evaluation of whether a significant financing component actually exi sts. It is a factor to consider, but it is not the only factor and is not determinative. As discussed above, an entity needs to consider all facts and circumstances in this evaluation. The TRG agenda paper noted that the list price may not always equal the cash selling price (i.e., the price that a customer would have paid for the promised goods or services if the customer had paid cash for those goods or services when (or as) they trans fer to the customer, as defined in IFRS 15.61). For example, if a customer offers to pay cash upfront when the entity is offering ‘free’ financing to customers, the customer that offers the upfront payment may be able to pay less than the list price. Deter mining a ‘cash selling price’ may require judgement and the fact that an entity provides ‘interest - free financing’ does not necessarily mean that the cash selling price is the same as the price another customer would pay over time. Entities would have to consider the cash selling price in comparison to the promised consideration in making the evaluation based on the overall facts and circumstances of the arrangement. This notion is consistent with IFRS 15.77 on allocating the transaction alone selling prices (see - price to performance obligations based on stand s ection 6.1), which indicates that a contractually stated price or a list price - alone for a good or service may be (but is not presumed to be) the stand selling price of that good or service. The TRG agenda paper noted that it may be possible for a financing component to exist, but that it may not ection, entities need to apply be significant. As discussed above in this s judgement in determining whether the financing component is si gnificant. - 1 9 : Does the standard preclude accounting for financing Question 5 – components that are not significant? [TRG meeting 30 March 2015 Agenda paper no. 30] TRG members generally agreed that the standard does not preclude an entity from deciding t o account for a financing component that is not significant. For example, an entity may have a portfolio of contracts in which there is a mix of significant and insignificant financing components. An entity g components as if they were could choose to account for all of the financin significant in order to avoid having to apply different accounting methods to each. An entity electing to apply the requirements for significant financing components to an insignificant financing component would need to be sistent in its application to all similar contracts with similar circumstances. con Updated October 2018 188 A closer look at IFRS 15, the revenue recognition standard

189 Frequently asked questions (cont’d) - : The standard includes a practical expedient that allows Question 5 20 an entity not to assess a contract for a significant financing component if the period between the customer’s payment and the entity’s transfer of 194 the goods or services is one year or less. How should entities consider lies to contracts with a single payment whether the practical expedient app stream for multiple performance obligations? [TRG meeting 30 March 2015 – Agenda paper no. 30] TRG members generally agreed that entities either apply an approach of allocating any consideration received: (1) To the earl iest good or service delivered Or Proportionately between the goods or (2) services depending on the facts and circumstances The TRG agenda paper on this topic provided an example of a telecommunications entity that enters into a two - year contract to provid e a device at contract inception and related data services over 24 months 195 Under approach (1) above, in exchange for 24 equal monthly instalments. an entity would be allowed to apply the practical expedient because the period between transfer of the good or service and customer payment would be less than one year for both the device and the related services. This is because, in the example provided, the device would be ’paid off’ after five months. Under approach (2) above, an entity would not be able to apply the practical expedient because the device would be deemed to be paid off over the full 24 greater than one year). months (i.e., bove may be appropriate in circumstances similar to the Approach (2) a example in the TRG agenda paper, when the cash payment is not directly tied to a particular good or service in a contract. However, approach (1) may be y tied to the earliest good appropriate when the cash payment is not directl or service delivered in a contract. Approach (1) may be appropriate when the cash payment is directly tied to the earliest good or service delivered. However, TRG members noted it may be difficult to tie a cash payment directl y to a good or service because cash is fungible. Accordingly, judgement is required based on the facts and circumstances. Question 5 - 21 : If a significant financing component exists in a contract, how does an entity calculate the adjustment to revenue? [TRG meeting 30 – March 2015 Agenda paper no. 30] TRG members generally agreed that the standard does not contain requirements for how to calculate the adjustment to the transaction price due to a significant financing component. A financing component is recognised as interest expense (when the customer pays in advance) or interest income (when the customer pays in arrears). Entities need to consider requirements outside IFRS 15 to determine the appropriate accounting treatment (i.e., IFRS 9). 194 IFRS 15.63. 195 , TRG Agenda paper no. 30 dated 30 March 2015. Significant Financing Components, A closer look at IFRS 15, the revenue recognition standard Updated October 2018 189

190 Frequently asked questions (cont’d) 22 - : How should an entity allocate a significant financing Question 5 component when there are multiple performance obligations in a contract? [TRG meeting 30 March 2015 Agenda paper no. 30] – The standard is clear that, when determining the transaction price in Step 3 of the model, the effect of financing is excluded from the transaction price prior to the allocation of the transaction price to performance obligations (which occurs in Step 4). However, stakeholders had questioned whether an adjustment for a significant financing component could ever be attributed to only one or some of the performance obligations in the contract, rather . This is because than to all of the performance obligations in the contract the standard only includes examples in which there is a single performance obligation. TRG members generally agreed that it may be reasonable for an entity to attribute a significant financing component to one or more, but not all, of t he performance obligations in the contract. In doing so, the entity may analogise to the exceptions for allocating variable consideration and/or discounts to one or more (but not all) performance obligations, if specified criteria are met (see s ections 6.3 and 6.4, respectively). However, attribution of a financing component to one (or some) of the performance obligations require s the use of judgement, especially because cash is fungible. Question 5 - 23 : Is an entity required to evaluate whether a customer o ption that provides a material right includes a significant financing component? If so, how would entities perform this evaluation ? [TRG meeting 30 March 2015 – Agenda paper no. 32] s See response to Question 4 - 1 8 ection 4.6. in Question - 24 : Can an entity 5 consider an interest expense arising from a customer contract with a significant financing component as borrowing costs eligible for capitalisation? IAS 23 requires borrowing costs to be capitalised if they Costs Borrowing are directly attributable to th e acquisition, construction or production of a qualifying asset (whether or not the funds have been borrowed specifically 196 for that purpose ). IAS 23 and IFRS 15 do not specifically address whether interest expense arising from a customer contract with a s ignificant financing component can be considered as borrowing costs eligible for capitalisation. According to IAS 23, borrowing costs are “interest and other costs that an 197 entity incurs in connection with the borrowing of funds.” I nterest expense arising from customer contracts with a significant financing component might qualif y as borrowing costs eligible for capitalisation if they are directly attributable to the acquisition, construction or production of a qualifying asset. 196 IAS 23.8 197 IAS 23.5 and IAS 23.6 Updated October 2018 190 A closer look at IFRS 15, the revenue recognition standard

191 Frequently asked questions (cont’d) For most revenue transactions, it is likely that entities would be considering ing asset. According inventory when determining whether there is a qualify to IAS 23, inventory can be a qualifying asset inventories that are , but “... manufactured, or otherwise produced, over a short period of time, are not qualifying assets. Assets that are ready for their intended use or sale when 198 not qualifying assets. ” acquired are Significiant judgement may be also etermine whether substantial period of time inventories take a needed to d to manufacture or produce before being ready for their intended use or . However, it may be helpful for an entity to consider how it satisfies its sale performance obligations as part of this determination. In particular, entities e that, i should not f a performance obligation is satisfied over time, by definition, the customer obtains control of the good or service (and the entity derecognises any related inventory) . As d iscussed in as the entity performs Question 7 - 14 in section 7.1.4 . C, its performance should not result in the creation of a material asset in the entity’s accounts (e.g., work in progress). It is also important to note that capitalisation of borrowing costs is not required by IAS 23 for inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis even if they meet the 199 definition of a qualifying asset. In late 2018, t he IFRS IC received a request on the capitalisation of borrowing assets being developed for sale for which revenue is recognised over costs on time. At the time of writing, the matter was not been being analyse d and had 200 discussed by the IF RS Interpretations Committee. ent (updated 5.5.2 Financial statement presentation of financing compon 2018) October As discussed above, when a significant financing component exists in a contract, the transaction price is adjusted so that the amount recognised as revenue is the ‘cash selling price’ of the underlying goods or services at the time of transfer. Essentially, a contract with a customer that has a significant financing component would be separated into a revenue component (for the notional cash sales price) and a loan component (for the effect of the deferred 201 or advance payment ter Consequently, the accounting for accounts ms). receivable arising from a contract that has a significant financing component 202 should be comparable to the accounting for a loan with the same features. The amount allocated to the significant financing comp onent would have to be presented separately from revenue recognised from contracts with customers. The financing component is recognised as interest expense (when the customer pays in advance) or interest income (when the customer pays in arrears). The int erest income or expense is recognised over the financing period using the effective interest method described in IFRS 9. The standard notes that interest is only recognised to the extent that a contract asset, contract liability or 203 under IFRS 15. receivable is recognised 198 IAS 23.7. 199 IAS 23.4(b) 200 IFRS IC Agenda paper 13, September 2018, IFRS Interpretations Committee Work in Progress , available on the IASB’s website . 201 IFRS 15.BC244. 202 IFRS 15.BC244. 203 IFRS 15.65. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 191

192 As discussed in section 10.1, (or receivable) or contract liability a contract asset is generated (and presented o n the balance sheet) when either party to a contract performs, depending on the relationship between the entity’s xample 26 in the standard (see ce and the customer’s payment. E performan section 5.5.1) illustrates a situation in which an entity transfers control of not required to pay for the good until a good to a customer, but the customer is two after delivery. The co ntract includes a significant financing component . years Furthermore, the customer has the right to return the good for 90 days. The product is new and the entity does not have historical evidence of returns activity. Therefore, the entity is not able to recogni se revenue (or a contract asset or receivable) upon delivery because it cannot assert that it is highly probable that a significant revenue reversal will not occur (i.e., it cannot assert that it is highly probable that the product will not be returned). Accordingly, during the 90 - day return period, the entity also cannot record interest income. However, as depicted in the example, once the return period lapses, the entity can record revenue and a receivable, as well as begin to recognise interest income. The IASB noted in the Basis for Conclusions that an entity may present interest income as revenue only when interest income represents income from an 204 entity’s ordinary activities. Although there are two components within the transaction price when there is a significant financing component (i.e., the revenue component and the significant financing component), it is only in the case of deferred payment terms that there are two cash flow components. In that case , the revenue classified as cash flows from operating component cash flows should be activities, and the cash flows related to the significant financing component should be classified consistent with the entity’s choice to present cash flows from interests received/paid in accordance with IAS 7.33 (i .e., as cash flows from operating or investing/financing activities). If the customer pays in advance, the sum of the cash amount and the accrued interest represent revenue, and thus there is only one cash flow component. Accordingly, the ould be classified as cash flows from operating activities. cash received sh Impairment losses on receivables, with or without a significant financing component, are presented in line with the requirements of IAS 1 Presentation and disclosed in acc ordance with IFRS 7 of Financial Statements Financial . However, IFRS 15 makes it clear that such amounts Instruments: Disclosures 205 are disclosed separately from impairment losses from other contracts. How we see it We believe entities may need to expend additional effort to track impairment losses on assets arising from contracts that are within the scope of IFRS 15 separately from impairment losses on assets arising from other contracts. Entities need to ensure that they have the appropriate systems, internal controls, policies a nd procedures in place to collect and separately present this information. 204 IFRS 15.BC247. 205 IFRS 15.113(b). Updated October 2018 192 A closer look at IFRS 15, the revenue recognition standard

193 5.6 Non - cash consideration - cash Customer consideration may be in the form of goods, services or other non consideration (e.g., property, plant and equipment, a financial instrument ). When an entity (i.e., the seller or vendor) receives, or expects to receive, non - cash - cash consideration is included in the consideration, the fair value of the non transaction price. ies the requirements of IFRS 13 An entity likely appl Fair Value Measurement when measuring the fair value of any non cash - or IFRS 2 - Share based payment consideration. If an entity cannot reasonably estimate the fair value of non - cash consideration, it measures the non - cash consideration indirectly by reference to the - alone selling price of the promised goods or services. For contracts stand with both non cash consideration and cash consideration, an entity need s - to measure the fair value of the non - cash consideration and it look s to other requirements within IFRS 15 to account for the cash consideration. For example, for a contract in which an entity receives non - cash consideration and a sales - based royalty, the entity would measure the fair value of the non - cash consideration and refer to the requirements within th e standard for the sales - based royalties. The fair value of non - the form of cash consideration may change both because of consideration (e.g., a change in the price of a share an entity is entitled to receive from a customer) and for reasons other than the form of consideration (e.g., a change in the exercise price of a share option because of the entity’s performance) . Under IFRS 15, if an entity’s entitlement to non - cash consideration promised by a customer is variable for reasons other than the form of consideration (i.e., there is uncertainty as to whether the entity receive the non - cash consideration if s a future event occurs or does not occur ), the entity considers the constraint on variable consideration. In some transactions, a customer contribut es goods or services, such as equipment or labour, to facilitate the fulfilment of the contract. If the entity obtains control of the contributed goods or services, it would consider them - non cash consideration and account for that consideration as describ ed above. Assessing whether the entity obtains control of the contributed goods or services by the customer may require judgement. - The Board also noted that any assets recognised as a result of non cash consideration are accounted for in accordance with ot her relevant standards (e.g., IAS 16). - The standard provides the following example of a transaction for which non cash consideration is received in exchange for services provided: Extract from IFRS 15 Example 31 — Entitlement to non - cash consideration (IFRS 15.IE156 - IE158) An entity enters into a contract with a customer to provide a weekly service for one year. The contract is signed on 1 January 20X1 and work begins immediately. The entity concludes that the service is a single performance obligation in accordance with paragraph 22(b) of IFRS 15. This is because the entity is providing a series of distinct services that are substantially the same and have the same pattern of transfer (the services transfer to the that is, customer over time and use the same me thod to measure progress — based measure of progress). - a time A closer look at IFRS 15, the revenue recognition standard Updated October 2018 193

194 Extract from IFRS 15 (cont’d) In exchange for the service, the customer promises 100 shares of its common stock per week of service (a total of 5,200 shares for the contract). The terms in the contract require that the shares must be paid upon the successful completion of each week of service. The entity measures its progress towards complete satisfaction of the performance obligation as each week of service is complete. To determin e the transaction price (and the amount of revenue to be recognised), the entity measures the fair value of 100 shares that are received upon completion of each weekly service. The entity does not reflect any ares received (or receivable) subsequent changes in the fair value of the sh in revenue. ed from legacy What’s chang IFRS? - cash consideration at fair value is consistent The concept of accounting for non legacy IFRS. IAS 18 require d cash consideration to be measured at non - with the fair value of the goods or services received. When this amount cannot be - measured reliably, non cash consideration is measured at the fair value of the 206 IFRIC 18 also require goods or services given up. d any revenue recognised as 207 a result of a transfer of an assets from a c ustomer to be measured, consistent with the requirement in IAS 18. Therefore, IFRS 15 did not result in a significant change in respect of the measurement of non cash consideration. - SIC - reliably measure revenue at the fair value of d that a seller c ould 31 specifie in a barter transaction, by reference to the advertising services it had provide d met 15 does not contain non - barter transactions that specified criteria. IFRS similar requirements. Therefore, significant judg ement and consideration of to be needed when accounting the specific facts and circumstances likely are for advertising barter transactions. cash consideration implementation considerations - 5.6.1 Non Stakeholders raised questions about the date that shoul d be used when - cash consideration for inclusion within the measuring the fair value of non - cash transaction price. In addition, constituents noted that the variability of non consideration could arise both from its form (e.g., shares) and for other reasons (e.g., performance factors that affect the amount of consideration to which the entity will be entitled). Consequently, they questioned how the constraint on variable consideration would be applied in such circumstances. members of the TRG discussed these At the January 2015 TRG meeting, questions and agreed that, while the standard requires non - cash consideration (e.g., shares, advertising provided as consideration from a customer) to be measured at fair value, it is unclear when that fair value must be measured (i.e., the measurement date). Members of the TRG discussed three measurement date options: contract inception; when it is received; or when the related performance obligation is satisfied. Each view received support IFRS 15 does not specify the measurement, from some TRG members. Since s to use its judgement to determine the most appropriate an entity need measurement date when measuring the fair value of non - cash consideration. However, in accordance with IFRS 15.126, information about the meth ods, inputs and assumptions used to measure non cash consideration need s to - 208 be disclosed. 206 IAS 18.12. 207 IFRIC 18.13. 208 IFRS 15.BC254E. Updated October 2018 194 A closer look at IFRS 15, the revenue recognition standard

195 IFRS 15 requires that the constraint on variable consideration be applied to non - cash consideration only if the variability is due to factors other than the form of consideration (i.e., variability arising for reasons other than changes in the price cash consideration). The constraint does not apply if the non - cash of the non - consideration varies because of its form (e.g., listed shares for which the share ges). However, the standard does not address how the constraint price chan would be applied when the non - cash consideration is variable due to both its form and other reasons. While some TRG members said the standard could be the consideration based on the source interpreted to require an entity to split of the variability, other TRG members highlighted that this approach would be overly complex and would not provide useful information. FASB differences ’s standard specif ies that the fair value of non - cash consideration The FASB s to need be measured at contract inception when determining the transaction price. Any subsequent changes in the fair value of the non - cash included consideration due to its form (e.g., changes in share price) are not in the transaction price and would be recognised, if required, as a gain or loss in accordance with other accounting standards, but would not be recognised as revenue from contracts with customers. However, in the Basis for Conclusions, the IASB observed that this issue has important interactions with other standards (including IFRS 2 and IAS 21) and there was a concern about the risk of unintended consequences. Therefore , the Board decided that, if needed, these issues would be considered more co mprehensively in 209 a separate project. T he IASB acknowledged in the Basis for Conclusions, that the use of a measurement date other than contract inception would not be precluded under IFRS. Consequently, it is possible that diversity between IFRS and US G AAP entities may arise in practice. Unlike US GAAP, legacy IFRS d id not contain specific requirements regarding the measurement cash consideration related to revenue transactions. As such, date for non - the IASB does not expect IFRS previously sity than 15 to create more diver 210 exist ed in relation to this issue. - ’s standard that when the variability of non also specifie cash The FASB s consideration is due to both the form of the consideration and for other reasons, the constraint on variable consideration would apply only to the IFRS 15 does not ha ve variability for reasons other than its form. While requirement , the Board noted in the Basis for Conclusions that it a similar decided to constrain variability in the estimate of the fair value of the non - cash consideration if that variability relates to changes in the fair value for the form of the consideration. It also noted the view reasons other than of some TRG members that, in practice, it might be difficult to distinguish between variability in the fair value due to the form of the consideration and other reasons, in which case applying the va riable consideration constraint to the whole estimate of the non - cash consideration might 211 be more practical. However, for reasons similar to those on the measurement date for non - cash consideration, the IASB decided not to have a similar requirement to that of the FASB ’s standard . Consequently, the IASB acknowledged that differences may arise between an entity 212 reporting under IFRS and an entity reporting under US GAAP. 209 IFRS 15.BC254C. 210 IFRS 15.BC254E. 211 IFRS 15.BC252. 212 IFRS 15.BC254H A closer look at IFRS 15, the revenue recognition standard Updated October 2018 195

196 5.7 Consideration paid or payable to a customer (updated October 2018) Many entities make payments to their customers. In some cases, the consideration paid or payable represents purchases by the entity of goods or services offered by the customer that satisfy a business need of the entity. In other cases, the consideration paid or payab le represents incentives given by the entity to entice the customer to purchase, or continue purchasing, its goods or services. The standard provides the following requirements for consideration paid or payable to a customer: Extract from IFRS 15 70. Consideration payable to a customer includes cash amounts that an entity pays, or expects to pay, to the customer (or to other parties that purchase the entity’s goods or services from the customer). Consideration payable to a customer also includes cr edit or other items (for example, a coupon or voucher) that can be applied against amounts owed to the entity (or to other parties that purchase the entity’s goods or services from the customer). An entity shall account for consideration payable to a custo mer as a reduction of the transaction price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct good or service 30) that the customer transfers to – (as described in paragraphs 26 the entity. If the consideration paya ble to a customer includes a variable amount, an entity shall estimate the transaction price (including assessing whether the estimate of variable consideration is constrained) in accordance with paragraphs 50 – 58. is a payment for a distinct good 71. If consideration payable to a customer or service from the customer, then an entity shall account for the purchase of the good or service in the same way that it accounts for other purchases from suppliers. If the amount of consideration payable to the custome r exceeds fair value of the distinct good or service that the entity receives from the the customer, then the entity shall account for such an excess as a reduction of the transaction price. If the entity cannot reasonably estimate the fair value ood or service received from the customer, it shall account for all of of the g the consideration payable to the customer as a reduction of the transaction price. 72. Accordingly, if consideration payable to a customer is accounted for as a reduction of the transa ction price, an entity shall recognise the reduction of revenue when (or as) the later of either of the following events occurs: (a) t he entity recognises revenue for the transfer of the related goods or services to the customer; and he entity pays or promis t es to pay the consideration (even if the payment (b) is conditional on a future event). That promise might be implied by the entity’s customary business practices. Updated October 2018 196 A closer look at IFRS 15, the revenue recognition standard

197 The following flow chart illustrates these requirements: Is the consideration payable to No the customer in exchange for a distinct good or service? Yes Account for the consideration payable to the customer as a reduc tion of the transaction price when (or as) the later of Can the fair value of the distinct the following occurs: No good or service be reasonably The entity recognises revenue for the • estimated? transfer of the related goods or services to the customer. The entity pays (or promises to pay) the • consideration. Yes For consideration paid up to the fair value Does the amount of of the distinct good or service received from Yes consideration payable to the the customer , account for the consideration customer exceed the fair value payable to the customer the same way that the entity accounts for other purchases of the distinct good or service? from suppliers. The excess would be accounted for as a reduction in the transaction price. No ration Account for the conside payable to the customer in the same way that the entity accounts for other purchases from suppliers. The standard indicates that an entity accounts for the consideration payable to a customer, regardless of whether the purchaser receiving the consideration is a direct or indirect customer of the entity. This includes consideration to any purchasers of the entity’s products at any point along the distribution chain. This would include entities that make payments to the customers of resellers manufacturers that purchase directly from the entity (e.g., or distributors of breakfast cereals may offer coupons to end - consumers, even though their - direct customers are the grocery stores that sell to end consumers). The requirements in IFRS 15 apply to entities that derive revenue from sales of services, as well as entities that derive revenue from sales of goods. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 197

198 Frequently asked questions - 5 : Who is considered to be an entity’s customer when applying Question 5 2 the requirements for consideration payable to a customer? [TRG meetings – Agenda paper no. 28; and 13 July 2015 – 30 March 2015 Agenda paper no. 37] TRG members generally agreed that the requirements for consideration payable to a customer apply to all payments made to entities/customers in the distribu tion chain for that contract. However, they agreed that there could also be situations in which the requirements would apply to payments made to any customer of an entity’s customer outside the distribution chain if both parties are considered the entity ’s customers. For example, in an arrangement with a principal, an agent and an end - customer, an agent may conclude that its only customer is the principal or it may conclude that it has two customers – the principal and the end - customer. Regardless of thi s assessment, an agent’s payment to a principal’s end - customer that was contractually required based on an agreement between the entity (agent) and the principal would represent consideration payable to a customer. Absent similar contract provisions that clearly indicate when an amount is consideration payable, TRG members agreed that agents need to evaluate their facts and circumstances to determine whether payments made to an end - customer would be considered a reduction of revenue or a marketing . expense 5.7.1 Classification of the different types of consideration paid or payable to a customer To determine the appropriate accounting treatment, an entity must first determine whether the consideration paid or payable to a customer is a payment for a distinct good or service, a reduction of the transaction price or a combination of both. For a payment by the entity to a customer to be treated as something other than a reduction of the transaction price, the good or service provided by the customer must be distinct (as discussed in s ection 4.2.1). However, if the payment to the customer is in excess of the fair value of the distinct good or service received, the entity must account for such excess as a reduction of the transaction pr ice. In the event that the entity cannot reasonably estimate the fair value of the good or service received from the customer, it will need to account for all of the consideration payable to the customer as a reduction in the transaction price. 5.7.2 Forms of consideration paid or payable to a customer Consideration paid or payable to customers commonly takes the form of discounts and coupons, among others. Furthermore, the promise to pay the consideration may be implied by the entity’s customary business p ractice. Consideration paid or payable to a customer can take many different forms. Therefore, entities have to carefully evaluate each transaction to determine the appropriate treatment of such amounts. Some common examples of consideration paid to a cus tomer include: Manufacturers of consumer products commonly pay retailers — • Slotting fees fees to have their goods displayed prominently on store shelves. Generally, such fees do not provide a distinct good or service to the manufacturer and a reduction of the transaction price. are treated as Updated October 2018 198 A closer look at IFRS 15, the revenue recognition standard

199 n entity • operative advertising arrangements — In some arrangements, a - Co reseller for a portion of costs incurred by the reseller agrees to reimburse a entity ’s products. The determination of whether the to advertise the payment from the vendor is in exchange for a distinct good or service at fair value depend s on a careful analysis of the facts and circumstances of the contract. n entity Price protection – A • may agree to reimburse a retailer up to a specified amount for shortfalls in the sales price received by the retailer for the ’s products over a specified period of time. Normally such fees do entity er and are treated not provide a distinct good or service to the manufactur as a reduction of the transaction price (see Question 5 - 7 in section 5.2.1) . • Coupons and rebates - An indirect customer of a n entity may receive a refund of a portion of the purchase price of the product or service acquired by returning a form to the retailer or the entity . Generally, such fees do not provide a distinct good or service to the manufacturer and are treated as a reduction of the transaction price. In some arrangements, a pays an • ’Pay - to - play’ arrangements — n entity upfront f ee to the customer in order to obtain a new contract. In most cases, these payments are not associated with any distinct good or service to be received from the customer and are treated as a reduction of the transaction price. Purchase of goods or services • Entities often enter into supplier - vendor — arrangements with their customers in which the customers provide them with a distinct good or service. For example, a software entity may buy its office supplies from one of its software customers. In such situ ations, the entity has to carefully determine whether the payment made to the customer is solely for the goods or services received or whether part of the payment is actually a reduction of the transaction price for the goods or services the entity is t ransferring to the customer. legacy What’s chang ed from IFRS? IFRS 15’s accounting for consideration payable to a customer is similar to practice under IFRS. However, the requirement to determine whether legacy a good or service is ’distinct’ in order to treat the consideration payable to a reduction of revenue is new. While many a customer as anything other than of the illustrative examples to IAS 18 impl ied that the entity would have to receive an ’identifia was sufficiently ble benefit’ from the customer that separable from the customer’s purchases of the not ’s products, it was entity legacy IFRS. As such, some entities may need to reassess explicitly discussed in ble to a customer. their treatment of consideration paid or paya A closer look at IFRS 15, the revenue recognition standard Updated October 2018 199

200 Frequently asked questions 2 : Which payments to a customer are within the scope of the - 6 Question 5 requirements for consideration payable to a customer? [TRG meetings 30 Agenda paper no. 28; and 13 July 2015 – March 2015 Agenda paper – 37] no. TRG members generally agreed that an entity may not need to separately analyse each payment to a customer if it is apparent that the payment is for a distinct good or service acquired in the normal course of business at if the business purpose of a payment to a customer a market price. However, is unclear or the goods or services are acquired in a manner that is inconsistent with market terms that other entities would receive when purchasing the customer’s good or services, the payment needs to b e evaluated under these requirements. In the Basis for Conclusions, the IASB noted that the amount of consideration received from a customer for goods or services and the amount of any consideration paid to that customer for goods or services may be linked 213 even if they are separate events. 5.7.3 Timing of recognition of consideration paid or payable to a customer (updated October 2018) If the consideration paid or payable to a customer is a discount or refund for goods or services provided to a customer, this reduction of the transaction price (and, ultimately, revenue) is recognised at the later of when the entity transfers the promised goods or services to the customer or the entity promises to pay the consideration. For example, if goods subject to a d iscount through a coupon are already delivered to the retailers, the discount would be recognised when the coupons are issued. However, if a coupon is issued that can be used on a new line of products that have not yet been sold to retailers, the discount would be recognised upon sale of the product s to a retailer. Certain sales incentives, such as mail in rebates and manufacturer coupons, - entitle a customer to receiv e a reduction in the price of good s or service s by submitting a form or claim for a refund of a specified amount of the price charged e a liability for to the customer at the point of sale . An entity must also recognis those sales incentives at the later of s es revenue on the good : (a) when it recognis . The amount o ; or (b) the date at which the sales incentive was offered s r service of liability will be based on the esti mated amount of discounts or refunds that will be claimed by customers , similar to how the entity would estimate variable consideration ( see section 5.2.2). Even if the sales incentives would result in a loss on the sale of the product or service, an entity would also recognis e a liability for those sales incentives at the s later of : (a) when it recognis es revenue on the good s or service ; or (b) the date at which the sales incentive was offered. That is, an entity would not recogni se the loss befor e either date . However, an entity would also need to consider that the net realisable value of inve ntories are lower whether the offer indicates 214 - down of inventories to net realisable value. than costs which will require write However, to determine the appropriate timing of recognition of consideration payable to a customer, entities also need to consider the requirements for variable considerati on. That is, the standard’s description of variable consideration is broad and includes amounts such as coupons or other forms of credits that can be applied to the amounts owed to an entity by the customer 213 IFRS 15.BC257. 214 IAS 2.9, IAS 2.28 Updated October 2018 200 A closer look at IFRS 15, the revenue recognition standard

201 (see s all potential variable ection 5.2.1 above). IFRS 15 requires that consideration be considered and reflected in the transaction price at contract inception and reassessed as the entity performs. In other words, if an entity has a history of providing this type of consideration to its customers, the requirements on estimating variable consideration would require that such amounts be considered at contract inception, even if the entity has not yet provided or explicitly promised this consideration to the customer. consistency that arises between The TRG discussed the potential in the requirements on consideration payable to a customer and variable consideration because the requirements specific to consideration payable to a customer indicate that such amounts are not recognised as a reduction 215 of r evenue until the of when: later • The related sales are recognised Or • The entity promises to provide such consideration. A literal read of these requirements seems to suggest that an entity need not anticipate offering these types of programmes, even if it has a history of doing so, and would only recognise the effect of these programmes at the later of when the entity trans fers the promised goods or services or makes a promise to pay the customer. Members of the TRG generally agreed that if an entity has histor ically provided or intends to provid e this type of consideration to customers, the requirements on estimating vari able consideration would require the entity to consider such amounts at contract inception when the transaction price is estimated, even if the entity has not yet provided or 216 If the consideration promised to provide this consideration to the customer. id or payable to a customer includes variable consideration in the form of a pa discount or refund for goods or services provided, an entity would use either the expected value method or most likely amount method to estimate the ects to be entitled and apply the constraint to amount to which the entity exp s ection 5.2.3 for further discussion) to determine the effect the estimate (see of the discount or refund on the transaction price. How we see it The general agreement by TRG members that entities need to con sider the f r o requirements variable consideration to determine the appropriate timing of recognition of consideration payable to a customer may result in a change in practice for some entities. Significant judgement may be needed to determine the appropri ate timing of recognition. 215 TRG Agenda paper no. 37, Consideration Payable to a Customer , dated 13 July 2015. 216 ssed and Next TRG Agenda paper no. 44, July 2015 Meeting – Summary of Issues Discu Steps 9 November 2015. , dated A closer look at IFRS 15, the revenue recognition standard Updated October 2018 201

202 The standard includes the following example of consideration paid to a customer: Extract from IFRS 15 Example 32 — Consideration payable to a customer (IFRS 15.IE160 - IE162) An entity that manufactures consumer goods enters into a one - year contract to sell goods to a customer that is a large global chain of retail stores. The customer commits to buy at least CU15 million of products during the year. refundable payment The contract also requires the entity to make a non - million to the customer at the inception of the contract. The of CU1.5 CU1.5 million payment will compensate the customer for the changes it needs to make to its shelving to accommodate the entity’s products. e entity considers the requirements in paragraphs 70 – Th 72 of IFRS 15 and concludes that the payment to the customer is not in exchange for a distinct good or service that transfers to the entity. This is because the entity does not obtain control of any righ ts to the customer’s shelves. Consequently, the entity determines that, in accordance with paragraph 70 of IFRS 15, ction of the transaction price. the CU1.5 million payment is a redu The entity applies the requirements in paragraph 72 of IFRS 15 and concludes that the consideration payable is accounted for as a reduction in the transaction price when the entity recognises revenue for the transfer tity transfers goods to the customer, of the goods. Consequently, as the en the entity reduces the transaction price for each good by 10 per cent million ÷ CU15 million). Therefore, in the first month in which (CU1.5 the entity transfers goods to the customer, the entity recognises revenue million (CU2.0 of CU1.8 million invoiced amount less CU0.2 million of consideration payable to the customer). Frequently asked questions : Question 5 - 2 7 How should an entity account for upfront payments to a 59] customer? [FASB TRG meeting 7 November 2016 – Agenda paper no. While the requirements for consideration payable to a customer clearly apply to payments to customers under current contracts, stakeholders have raised questions about how to account for upfront payments to potential customers and paym ents that relate to both current and anticipated contracts. FASB TRG members discussed two approaches. Under View A, an entity would recognise an asset for the upfront payment and reduce revenue as the related goods or services (or as the expected relate d goods or services) are transferred to the customer. As a result, the payment may be recognised in profit or loss over a period that is longer than the contract term. Entities would determine the amortisation period based on facts and circumstances uld assess the asset for recoverability using the principles in asset and wo impairment models in other standards. Under View B, entities would reduce revenue in the current contract by the amount of the payment. If there is no mediately recognise the payment in profit current contract, entities would im or loss. FASB TRG members generally agreed that an entity need to use the s approach that best reflects the substance and economics of the payment to the customer; it would not be an accounting policy choice. Entities would Updated October 2018 202 A closer look at IFRS 15, the revenue recognition standard

203 Frequently asked questions (cont’d) evaluate the nature of the payment, the rights and obligations under the contract and whether the payment meets the definition of an asset. Some FASB TRG members noted that this evaluation was consistent with legacy stomers and, therefore, similar US GAAP requirements for payments to cu conclusions may be reached under the revenue standard. FASB TRG members also noted that an entity’s decision on which approach is appropriate may be a significant judgement in the determination of the would require disclosure under the revenue standard. transaction price that How we see it We believe an entity has to carefully evaluate all facts and circumstances of payments made to customers to determine the appropriate accounting treatment. However, i f an entity expects to generate future revenue associated with the payment, we believe an entity generally appl View A ies (assuming any asset recorded is recoverable). If no revenue is expected as a result of the payment, View B may be appropriate. Frequently asked questions result from consideration paid or Question 5 - 2 8 : Would ‘negative revenue’ payable to a customer that exceeds the amount to which the entity expects ? to be entitled In certain arrangements, consideration paid or payable to a customer could exceed the consideration to which the entity expects to be entitled in exchange for transferring promised goods or services in a contract with a customer. In these situations, reco gnition of payments to the customer as a reduction of revenue could result in ‘negative revenue’. IFRS 15 does not specifically address how entities should present negative revenue. Stakeholders had asked the TRG whether an entity should reclassify negat ive revenue resulting from consideration paid or payable to a customer to if so, in what circumstances. expense and , The TRG did not discuss this question in detail and no additional application guidance was provided . As discussed above, IFRS 15.70 states that an entity shall account for consideration payable to a customer as a reduction of the transaction price (and, therefore, of revenue), unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to th e entity. appropriate Therefore, we believe it is for an entity to present payments to a customer in excess of the transaction price that are not in exchange for a distinct good or service within revenue . A closer look at IFRS 15, the revenue recognition standard Updated October 2018 203

204 5.8 Non - (updated October 2018) refundable upfront fees In certain circumstances, entities may receive payments from customers before they provide the contracted service or deliver a good. Upfront fees generally - up of a good to be used or a service relate to the initiation, activation or set ded in the future. Upfront fees may also be paid to grant access to be provi or to provide a right to use a facility, product or service. In many cases, the - refundable. Examples include upfront amounts paid by the customer are non fees paid for membership to a health club or buying club and activation fees for phone, cable or internet services. Entities must evaluate whether a non - refundable upfront fee relate s to the transfer of a promised If it does, the entity is required to good or service. count for the promised good or service as a separate determine whether to ac section 4). performance obligation (see The standard notes that, even though a non - refundable upfront fee relates to an activity that the entity is required to undertake at or near contract inception not result in the i , that activity does n order to fulfil the contract, in many cases 217 transfer of a promised good or service to the customer. I nstead, i n many situations, an upfront fee represents an advance payment for future goods or services. In addition refundable upfront fee may indicate , the existence of a non - that the contract includes a renewal option for future goods or services at a reduced price (if the customer renews the agreement without the payment of an additional upfront fee). In such circumstances, an entity would need to assess to determine whether the option is a material right (i.e., another performance obligation in the contract) (see s ection 4.6). If the entity concludes - refunda ble upfront fee does not provide a material right, the fee that the non would be part of the consideration allocable to the goods or services in the contract and would be recognised when (or as) the good or service to which ed to the customer. If an entity the consideration was allocated is transferr concludes that the non - refundable upfront fee provides a material right, the amount of the fee allocated to the material right would be recognised over the period of benefit of the fee, which may be the estimated customer life. The following illustration depicts the allocation of a non - refundable upfront fee determined to be a material right: - 2 — Illustration 5 Non - refundable upfront fees A customer signs a one - year contract with a health club and is required to pay both - refundable initiation fee of CU150 and an annual membership a non fee in monthly instalments of CU40. At the end of each year, the customer can renew the contract for an additional year without paying an additional initiation fee. The customer is then requ ired to pay an annual membership fee in monthly instalments of CU40 for each renewal period. The club’s activity of registering the customer does not transfer any service to the customer and, therefore, is not a performance obligation. By not requiring the customer to pay the upfront membership fee again upon renewal, the club is effectively d renewal rate to the customer. providing a discounte 217 IFRS 15.B49. Updated October 2018 204 A closer look at IFRS 15, the revenue recognition standard

205 (cont’d) Illustration 5 — Non - refundable upfront fees 2 - right because it The club determines that the renewal option is a material provides a renewal option at a lower price than the range of prices typically charged for new customers. Therefore, it is a separate performance obligation. Based on its experience, the club determines that its customers, w their annual memberships twice before terminating their on average, rene relationship with the club. As a result, the club determines that the option provides the customer with the right to two annual renewals at a discounted price. In this scenario, the club would alloc ate the total transaction consideration of CU630 (CU150 upfront membership fee + CU480 (CU40 x 12 months)) to the identified performance obligations (monthly services for - year contract and renewal option) based on the relative stand - alone the one 15.B40, t rice method. In accordance with IFRS he amount allocated selling p to the renewal option would be recognised , or as , the future goods or when services are transferred (e.g., years two and three of the services if the ) renewal is fully exercised option or when the renewal option expires . Alternatively, the club could value the option by ‘looking through’ to the services using the practical alternative provided in optional goods or 15.B42 (see s IFRS ection 6.1.5). In that case, the club would determine that the total hypothetical transaction price (for purposes of allocating the transaction price to the option) is the sum of the upfront fee plus three years of service fees (i.e., CU150 + CU1,440) and would allocate that amount to ected to be delivered or 36 months of membership (or all of the services exp CU44.17 per month). Therefore, the total consideration in the contract of CU630 would be allocated to the 12 months of service (CU530 (CU44.17 x he renewal option 12 months)) with the remaining amount being allocated to t – 530)). Assuming the renewal option is exercised for year 2 (CU100 (CU630 and year 3, t he amount allocated to the renewal option (CU100) would be recognised as revenue over each renewal period. One acceptable approach the initial CU100 deferred revenue balance for the would be to reduce material right by CU4.17 each month (CU100 / 24 months remaining), assuming that the estimated renewal period of two years remains unchanged. See s ections 4.6 and 6.1.5 for a more detailed discussion of th e treatment of options (including the practical alternative allowed under IFRS 15.B42) and ections 6.1 and 6.2 for a discussion of estimating stand s - alone selling prices and allocating consideration using the relative stand - alone selling price method. Th e standard notes that, in some cases, an entity may charge a non refundable - fee in part as compensation for costs incurred in setting up a contract (or other administrative tasks). If those set - up activities do not satisfy a performance obligation, the ent ity is required to disregard th em (and the related costs) when measuring progress (see ection 7.1.4). This is because the costs of set - up s activities do not depict the transfer of services to the customer. In addition, the entity is required to assess whet her costs incurred in setting up a contract are costs incurred to fulfil a contract that meet the requirements for capitalisation 218 in IFRS 15 (see s ection 9.3.2). 218 IFRS 15.B51. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 205

206 Frequently asked questions 2 : Over what period would an entity recognise a non - - 9 Question 5 refundable upfront fee (e.g., fees paid for membership to a club, activation fees for phone, cable or internet services) that does not relate to the transfer of a good or service? [TRG meeting 30 March 2015 Agenda paper – no. 32] TRG members generally agreed that the period over which a non - refundable is recognised depends on whether the fee provides the customer upfront fee with a material right with respect to future contract renewals. For example, assume that an entity charges a one time activation f ee of CU50 - - to - month basis. If to provide CU100 of services to a customer on a month the entity concludes that the activation fee provides a material right, the fee would be recognised over the service period during which the customer is expected to benef it from not having to pay an activation fee upon renewal of service. That period may be the estimated customer life in some situations. If the entity concludes that the activation fee does not provide a material right, contract term (i.e., one month). the fee would be recognised over the Question 5 30 : How does a utility entity determine whether a contract that - - includes a non refundable upfront fee received for establishing a connection to a network (i.e., a connection fee) is within the scope of IFRS 15 ? Utility entities are often responsible for constructing infrastructure ( e.g., a pipe) that will physically connect a building to its network ( connection) i.e., and for providing ongoing services (e.g., delivery of electricity, gas, water). In exchange, a utility entity generally charge s the customer a non - refundable upfront conne ction fee and a separate fee for the ongoing services. Furthermore, the connection fee and/or the fee for ongoing services are h a formal regulatory often subject to rate regulation established throug framework that affects the rates that a utility entity is allowed to charge to its customers. tility entit ies first need to assess whether some or all of the contract U is 17 (or IFRS 16 , when within the scope of another standard (e.g., IAS effective) , IAS 16). If the contract is partially with in the scope of IFRS 15 , the entity would need to separate the non - revenue components, in accordance 15 with IFRS 15.7, and account for the remainder within the scope of IFRS further discussion) (see section 2.4 for . To be within the scope of IFRS - customer relationship needs to 15, a vendor exist. Provided such goods or services are an output of the ordinary activities we believe a vendor - customer relationship would exist (and the of the entity, ontract would be wholly, or partially, within the scope of the standard) if: c T • he ongoing service is part of the contract or part of an associated contract for ongoing services that is combined with the contract to ontract criteria in IFRS 15 .17 establish the connection if the combined c are met. In a rate - regulated environment , the contract to transfer ongoing services to a customer (e.g., delivery of energy) may be implied as the customer has no alternative other than purchasing the good or service from the entity that is responsible for creating the connection. Or T (e.g., a pipe) or he customer obtains control of the infrastructure asset • the connection. Updated October 2018 206 A closer look at IFRS 15, the revenue recognition standard

207 Frequently asked questions (cont’d) What f - 1 5 3 actors might be relevant when a utility entity applies Question : - refundable upfront fees for establishing a the application guidance to non connection to a network? - 30 , utility entities are often As discussed in Question 5 responsible for ( e.g., a pipe) that will physically connect a constructing infrastructure and may receive a i.e., connection) - non building to its network ( refundable upfront conne ction fee in exchange Applying the non - refundable upfront . fee application guidance in such contracts often require significant s judgement and depends on the facts an d circumstances . For example, if more than one party is involved, the utility entity may need to consider the principal versus agent application guidance in addition (see section 4.4) to the non - refundable upfront fee application guidance . The non - refundable upfront fee application guidance requires an entity to determine if the upfront fee is related to a distinct good or service. As part of this assessment: • needs to determine whether the connection is a promised A utility entity e in the contract. considers explicit promises in the It good or servic contract and implied promises that create a valid expectation of the customer that will transfer control of the connection to the customer . it nfrastructure asset This is likely to require significant judgement if the i remains an asset of the utility entity. • If the connection is a promised good or service, a utility entity needs to determine whether the promise is distinct . In particular, t he assessment of whether the connection is distinct in the co ntext of the contract is highly judgemental and must consider the specific contract with the customer, including all relevant facts and circumstances . Entities should not assume that a particular type of good or service is distinct (or not distinct) in all instances. The manner in which the promised goods and services have been bundled within a contract , if any, will affect the entity’s assessment. As part of assess ing whether the promise is distinct within the context of , con siders the three factors described in the contract a utility entity FRS I 15 .29, as follows: • Factor (a): The utility entity needs to understand the promise(s) it has made to its customers and whether it integrates them to satisfy the it promised its customer its promise(s). For example, if ongoing supply of services , it might also bear the risk for distribution of these T herefore, it may services (including ensuring continued connection) . be providing a significant service of integrating promised goods or services to provide a combined output. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 207

208 Frequently asked questions (cont’d) • Factor (b): This factor is unlikely to be relevant in the assessment distinct within the context of the contract of whether connection is because the ongoing service and the connection are unlikely to modify or customise each other. • Factor (c): The utility entity has to determine whether the connection is highly interdependent and highly interrelated with the ongoing service (e.g., supply o For example, whether there is f electricity). more than just a functional relationship (i.e., one item, by its nature, depends on the other) because the utility entity cannot provide ongoing services (its main output, e.g., electricity, gas, water) without the connection and the customer cannot benefit from - two way there the connection without the ongoing services (i.e., is dependency ? ). If the utility entity concludes that connection is not a distinct good or service, refundable upfront fee is adv anced payment for future goods or - the non services and is recognised as revenue when (or as) the future goods or are provided. As discussed above, in such situations, an entity must services determine whether the non - refundable upfront fee represents an option to renew the contract at a lower price and must assesses whether the option to renew represents a material right. Significant judgement may be needed to determine whether the customer he fact that the customer remains has a material right. Howev er, t connection connected to the network and does not to pay the fee again , for example, might indicate that a material while in the same property right exists. If the renewal option represents a material right, the peri od over which the upfront fee is recognised is longer than the initial contract period. It is likely that significant judgement will be needed to determine the appropriate period over which to recognise the upfront fee in such above) . circumstances (see Question 5 - 2 9 5.9 Changes in the transaction price ection 6.5 s Changes in the transaction price can occur for various reasons. See for additional requirements on accounting for a change in transaction price. Updated October 2018 208 A closer look at IFRS 15, the revenue recognition standard

209 6. Allocate the transaction price to the performance obligations The standard’s objective for the allocation of the transaction price to the performance obligations identified in a contract is as follows: , Extract from IFRS 15 73. The objective when allocating the transaction price is for an entity to allocate the transaction price to each performance obligation (or distinct good or service) in an amount that depicts the amount of consideration entitled in exchange for transferring to which the entity expects to be the promised goods or services to the customer. Once the separate performance obligations are identified and the transaction price has been determined, the standard generally requires an entity to allocate action price to the performance obligations in proportion to their the trans - stand on a relative stand - alone selling price basis). The alone selling prices (i.e., Board noted in the Basis for Conclusions that, in most cases, an allocation based on stand - g prices will faithfully depict the different margins that may alone sellin 219 apply to promised goods or services. When allocating on a relative stand - alone selling price basis, any discount within the contract generally is allocated proportionately to all of the perfor mance obligations in the contract. However, as discussed further below, there are some exceptions. For example, an entity could allocate variable consideration to a single performance obligation in some situations. IFRS 15 also contemplates the allocation of any discount in a contract to only certain performance obligations, if specified criteria are met. An entity would not apply the allocation requirements if the contract has only one performance obligation (except for a single performance obligation tha t is made up of a series of distinct goods or services and includes variable consideration). 6.1 Determining stand October (updated - alone selling prices 2018) alone selling price basis, - To allocate the transaction price on a relative stand an entity must first determine the stand - alone selling price of the distinct good or service underlying each performance obligation. Under the standard, this is - alone (or the price at which an entity would sell a good or service on a stand at contract inception. separate) basis indicates the observable price of a good or service sold separately IFRS 15 provides the best evidence of stand - alone selling price. However, in many situations, stand - alone selling prices will not be readily observable. In those ca ses, the entity must estimate the stand - alone selling price. The standard includes estimating stand - alone selling prices : the following requirements on Extract from IFRS 15 78. If a stand - alone selling price is not directly observable, an entity shall est imate the stand - alone selling price at an amount that would result in the allocation of the transaction price meeting the allocation objective in paragraph 73. When estimating a stand - alone selling price, an entity shall specific factors consider all information (includin g market conditions, entity - 219 IFRS 15.BC266. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 209

210 Extract from IFRS 15 (cont’d) and information about the customer or class of customer) that is reasonably available to the entity. In doing so, an entity shall maximise the use of estimation methods consistently in similar observable inputs and apply circumstances. 79. Suitable methods for estimating the stand - alone selling price of a good or service include, but are not limited to, the following: (a) — an entity could evaluate t he Adjusted market assessment approach market in which it sells goods or services and estimate the price that a customer in that market would be willing to pay for those goods or services. That approach might also include referring to prices from the entity’s competitors for similar goods or services and adjusting those prices as necessary to reflect the entity’s costs and margins. Expected cost plus a margin approach — an entity could forecast its (b) expected costs of satisfying a performance obligation and then add an appropriate margin for that good or service. (c) Residual approach — an entity may estimate the stand - alone selling price by reference to the total transaction price less the sum of the observable stand - alone selling prices of other goods or services promised in the contract. However, an entity may use a residual approach to estimate, - in accordance with paragraph 78, the stand alone selling price of a good or service only if one of the following criteria is met: (i) he entity sells the same good or service to different customers (at t or near the same time) for a broad range of amounts (ie the selling price is highly variable because a representative stand - alone selling price is not discernible from past transactions or other observable evidence); or (ii) t he entity has not yet established a price for that good or service and the good or service has not previously been sold on a stand - alone basis (ie the selling price is uncertain). 80. A combination of methods may need to be used to estimate the stand - alone s elling prices of the goods or services promised in the contract if two or more of those goods or services have highly variable or uncertain stand - alone selling prices. For example, an entity may use a residual approach to estimate the aggregate stand - alone selling price for those promised goods or services with highly variable or uncertain stand - alone selling prices and then use another method to estimate the stand - alone selling prices of the individual goods or services relative to that estimated aggregate stand - alone selling price determined by the residual approach. When an entity uses a combination of methods to estimate the stand - alone selling price of each promised good or service in the contract, the entity shall evaluate whether alone selling prices transaction price at those estimated stand - allocating the would be consistent with the allocation objective in paragraph 73 and the alone selling prices in paragraph 78. - requirements for estimating stand Updated October 2018 210 A closer look at IFRS 15, the revenue recognition standard

211 chart illustrates how an e ntity might determine the stand - The following flow which may include alone selling price of a good or service, estimation: Is the stand - alone selling Yes No price directly observable? Estimate the stand - alone selling price by maximising the use of Use the observable price. observable inputs. Possible estimation approaches include: Other reasonable Adjusted market Residual approach estimation Expected cost plus assessment (in limited that approaches a margin approach* approach* circumstances)* maximise observable inputs * See section 6.1.2 for further discussion of these estimation approaches , including when . it might be appropriate to use a combination of approaches are not Stand - alone selling prices are determined at contract inception and updated to reflect changes between contract inception and when performance alone selling is complete. For example, assume an entity determines the stand - price for a promised good and, before it can finish manufacturing and deliver that good, the un derlying cost of the materials doubles. In such a situation, the entity would not revise its stand alone selling price used for this contract. - However, for future contracts involving the same good, the entity would need to determine whether the change in circumstances (i.e., the significant increase in the cost to produce the good) warrants a revision of the stand alone selling - price. If so, the entity would use that revised price for allocations in future ection 6.1.3). contracts (see s Furthermore, if t he contract is modified and that modification is treated as a termination of the existing contract and the creation of a new contract - (see alone s ection 3.4.2), the entity would update its estimate of the stand selling price at the time of the modificati on. If the contract is modified and the modification is treated as a separate contract (see s ection 3.4.1), the - alone accounting for the original contact would not be affected (and the stand selling prices of the underlying goods services would not be updated), or but the stand - alone selling prices of the distinct goods or services of the new, separate contract would have to be determined at the time of the modification. What’s chang ed IFRS? from legacy The requirements in IFRS 15 for the allocation of the transaction price to performance obligations could result in a change in practice for many entities. IAS 18 d not prescribe an allocation method for arrangements involving id cation methodologies: multiple goods or services. IFRIC 13 mention ed two allo allocation based on relative fair value; and allocation using the residual method. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 211

212 However, IFRIC not prescribe a hierarchy. Therefore, previously an entity 13 d id use its judgement to select the most appropriate methodology, t aking into had to consideration all relevant facts and circumstances and ensuring the resulting was allocation consistent with IAS 18’s objective to measure revenue at the fair value of the consideration. legacy IFRS on arrangements involving multiple Given the limited guidance in d goods or services, some entities ha legacy US GAAP to develop their looked to - alone selling price accounting policies. The requirement to estimate a stand is not a new concept if a directly observable selling price is not available r entities that ha d developed their accounting policies by reference to the fo element arrangements requirements in ASC - - 605 multiple 25. The requirements in IFRS 15 for estimating a stand - alone selling price are generally consistent the legacy guidance i ASC 605 - 25, except that they do not require an with n entity to consider a hierarchy of evidence to make this estimate. ome entities ha S looked to the provisions of ASC 605 - 25 by developing d estimates of selling prices for elements within an arrangement that e xhibit ed highly variable pricing, as described in ection 6.1.2. IFRS 15 may allow those s entities to revert to a residual approach. The requirement to estimate a stand - alone selling price may be a significant change for entities reporting under IFRS that ha d looked to other legacy US GAAP requirements to develop their accounting policies for revenue recognition, such as the software revenue recognition requirements in a different threshold for determining ASC 985 - 605. Those requirements ha d selling price, requiring observable evidence and not - the stand alone management estimates. Some of these entities may find it difficult to - alone selling price, particularly for goods or services that determine a stand specified upgrade software). In certain rights for are never sold separately (e.g., alone selling price circumstances, an entity may be able to estimate the stand - s ection 6.1.2). of a performance obligation using a residual approach (see - alone selling p 6.1.1 Factors to consider when estimating the stand rice To estimate the stand alone selling price (if not readily observable), an entity - the standard says an entity may consider the stated prices in the contract, but that a contractually stated price or a list price for a good cannot presume - or service is the stand alone selling price. As stated in the extract above, an “entity shall consider all information (including market conditions, entity - specific factors and information about the customer or class of customer) that 220 able to the entity” - to estimate a stand is reasonably avail alone selling price. An entity also need s to maximise the use of observable inputs in its estimate. s to consider a variety This is a very broad requirement for which an entity need of data sources. st, which is not all - The following li inclusive, provides examples of market conditions to consider: • Potential limits on the selling price of the product • Competitor pricing for a similar or identical product • Market awareness and perception of the product • Current market tre nds that are likely to affect the pricing • The entity’s market share and position (e.g., the entity’s ability to dictate pricing) 220 IFRS 15.78. Updated October 2018 212 A closer look at IFRS 15, the revenue recognition standard

213 • Effects of the geographic area on pricing Effects of customisation on pricing • • Expected life of the product, including whether s ignificant technological advances are expected in the market in the near future - specific factors include: Examples of entity Profit objectives and internal cost structure • • Pricing practices and pricing objectives (including desired gross profit margin) Effe cts of customisation on pricing • Pricing practices used to establish pricing of bundled products • • the size of the deal, Effects of a proposed transaction on pricing (e.g., the characteristics of the targeted customer) Expected life of the product, including whether significant entity - specific • technological advances are expected in the near future To document its estimated stand alone selling price, an entity should consider - describing the information that it has considered (e.g., the factors listed above), especially if there is limited observable data or none at all. 6.1.2 Possible estimation approaches (updated October 2018) IFRS 15.79 discusses three estimation approaches: (1) the adjusted market assessment approach; (2) the expected cost plus a margin approach; and (3) a residual approach. All of these are discussed further below. When applying different estimation approach for each o use a IFRS 15, an entity may need t of the distinct goods or services underlying the performance obligations in a contract. In addition, an entity may need to use a combination of approaches stand alone selling prices of goods or services promised in a to estimate the - r contract if two o more of those goods or services have highly variable or uncertain stand - alone selling prices. Furthermore, these are not the only estimation approaches permitted. IFRS 15 ch, as long as it is consistent with the allows any reasonable estimation approa notion of a stand - alone selling price, maximises the use of observable inputs and is applied on a consistent basis for similar goods or services and customers. In some cases, an entity may have sufficient observabl e data to determine the stand - - alone alone selling price. For example, an entity may have sufficient stand sales of a particular good or service that provide persuasive evidence of the stand alone selling price of a particular good or service. In such situa tions, no - estimation would be necessary. In many instances, an entity may not have sufficient stand - alone sales data to determine the stand alone selling price based solely on those sales. In those - instances, it must maximise the use of whatever observab le inputs it has available in order to make its estimate. That is, an entity would not disregard any observable inputs when estimating the stand - alone selling price of a good or service. An entity should consider all factors contemplated in negotiating th e contract with the customer and the entity’s normal pricing practices factoring in the most objective and reliable information that is available. While some entities may have robust practices in place regarding the pricing of goods or services, alone - eed to improve their processes to develop estimates of stand some may n selling prices. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 213

214 The standard includes the following estimation approaches: Adjusted market assessment approach — this approach focuses on • the amount that the entity believes the market in which it sells goods or services is willing to pay for a good or service. For example, an entity might refer to competitors’ prices for similar goods or services and adjust those flect the entity’s costs and margins. When using prices, as necessary, to re the adjusted market assessment approach, an entity considers market conditions, such as those listed in ection 6.1.1. Applying this approach is s likely be easiest when an entity has sold the good or servi ce for a period to of time (such that it has data about customer demand) or a competitor offers similar goods or services that the entity can use as a basis for its analysis. Applying this approach may be difficult when an entity is selling ood or service because it may be difficult to anticipate an entirely new g market demand. In these situations, entities may want to use the market assessment approach, with adjustments, as necessary, to reflect the entity’s costs and margins, in combination with other appro aches to maximise the use of observable inputs (e.g., using competitors’ pricing, adjusted based on the market assessment approach in combination with an entity’s planned internal pricing strategies if the performance obligation has never been sold separa tely). • Expected cost plus margin approach — this approach focuses more on internal factors (e.g., the entity’s cost basis), but has an external component as well. That is, the margin included in this approach must reflect the margin the market would be wil ling to pay, not just the entity’s desired margin. The margin may have to be adjusted for differences in products, geographies, customers and other factors. The expected cost plus margin approach may be useful in many situations, especially when the perf ormance obligation has a determinable direct fulfilment cost ( e.g., a tangible product or an hourly service) . However, this approach may be less helpful when there are no clearly identifiable direct fulfilment costs or the amount of those costs is unknown (e.g., a new software licence or specified . upgrade rights) • – this approach allows an entity to estimate the stand - Residual approach alone selling price of a promised good or service as the difference between the total transaction price and the observable (i.e., not estimated) stand - alone selling prices of other promised goods or services in the contract, provided one of two criteria are met. Because the standard indicates that contracts with multiple promised goods or this approach can only be used for services when the selling price of one or more goods or services is unknown (either because the historical selling price is highly variable or because the his goods or services have not yet been sold), we anticipate that the use of t is likely to approach be limited. However, allowing entities to use a residual technique provide s relief to entities that rarely, or never, sell goods or services on a stand - alone basis, such as entities that sell intellectual property only with physic al goods or services. of the residual The Board noted that the use or Conclusions in the Basis f approach cannot result in a stand - alone selling price of zero if the good or 221 This is because a good or service must have value service is distinct. on a stan - alone basis to be distinct . The Board d also stated that , if use of or no, consideration being the residual approach results in very little, 221 IFRS 15.BC273. Updated October 2018 214 A closer look at IFRS 15, the revenue recognition standard

215 allocated to a good or service or a bundle of goods or services, an entity e residual approach re whether the use of th evaluate is appropriate. should - n A example of an appropriate use of the residual approach would be an entity that frequently sells software, professional services and maintenance, bundled together, at prices that vary widely. The entity also sells the professional services and maintenance individually at relatively stable prices. The Board indicated that it may be appropriate to estimate the stand - alone selling price for the software as the difference between the total transaction price and the observa ble selling prices of the professional services and maintenance. See Example 34 , Cases B and C , from IFRS 15 (included in ection 6.4) for examples of when the residual approach may s or may not be appropriate. T he Board clarified in the Basis for Conclusi ons that an entity could also use the residual approach if there are two or more goods or services in the contract with highly variable or uncertain stand - alone selling prices, provided act has that at least one of the other promised goods or services in the contr - alone selling price. The Board observed that, in such an an observable stand instance, an entity may need to use a combination of techniques to estimate 222 alone selling prices. the stand For example, an entity may apply the - mate the aggregate of the stand alone selling prices residual approach to esti - for all of the promised goods or services with highly variable or uncertain stand - alone selling prices, but then use another approach (e.g., adjusted mate the stand - alone market assessment, expected cost plus margin) to esti selling prices of each of those promised goods or services with highly variable or uncertain stand alone selling prices. - The standard includes the following example in which two estimation - alone s elling prices of two different approaches are used to estimate stand goods in a contract : Extract from IFRS 15 — - IE166) Example 33 Allocation methodology (IFRS 15.IE164 An entity enters into a contract with a customer to sell Products A, B and C in exchange for CU100. The entity will satisfy the performance obligations for each of the products at different points in time. The entity regularly sells Product A separately and therefore the stand - alone selling price is directly observable. The stand alone selling prices of Products B and C are not directly - observable. Because the stand - alone selling prices for Products B and C are not directly observable, the entity must estimate them. To estimate the stand - alone selling prices, the entity uses the ad justed market assessment approach for Product B and the expected cost plus a margin approach for Product C. In making those estimates, the entity maximises the use of observable inputs 222 IFRS 15.BC272. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 215

216 Extract from IFRS 15 (cont’d) IFRS 15). The entity estimates the stand (in accordance with paragraph 78 of - alone selling prices as follows: Stand - alone selling price Product Method CU Product A Directly observable (see paragraph 77 50 of IFRS 15) Product B 25 Adjusted market assessment approach (see paragraph 79(a) of IFRS 15) Product C Expected cost plus a margin approach 75 (see paragraph 79(b) of IFRS 15) Total 150 The customer receives a discount for purchasing the bundle of goods because the sum of the stand - alone selling prices (CU150) exceeds the promised consideration (CU100). The entity considers whether it has observable evidence about the performance obligati on to which the entire discount belongs (in accordance with paragraph 82 of IFRS 15) and concludes that it does not. Consequently, in accordance with paragraphs 76 and 81 of 15, the discount is allocated proportionately across Products A, B and IFRS C. Th e discount, and therefore the transaction price, is allocated as follows: Allocated transaction price Product CU Product A 33 (CU50 ÷ CU150 × CU100) Product B 17 (CU25 ÷ CU150 × CU100) 50 (CU75 ÷ CU150 × CU100) Product C Total 100 Given the flexibility provided by the standard, it is both appropriate and necessary for entities to tailor the approach(es) used to estimate the stand - alone selling prices to their specific facts and circumstances. Regardless of whether the entity uses a single approach or a combination of approaches to estimate the stand - alone selling price, the entity would evaluate whether the resulting allocation of the transaction price is consistent with the overall allocation objective in IFRS 15.73 and the requirements for estimating stand - alone selling prices above. In accordance with IFRS 15, an entity must make a reasonable estimate of the stand - alone selling price for the distinct good or service underlying each performance obligation if an observable s elling price is not readily available. In developing this requirement, the Board believed that, even in instances in which limited information is available, entities should have sufficient information to develop a reasonable estimate. Updated October 2018 216 A closer look at IFRS 15, the revenue recognition standard

217 How we see it - ating stand alone selling prices may require a change in practice. Estim 18 d id IAS not prescribe an allocation method for arrangements involving multiple goods or services. As a result, entities have used a variety of approaches, which may not be based on curre nt selling prices. had developed their accounting policies by In addition, entities that legacy - 25 should note US GAAP requirements in ASC 605 reference to the is no longer a hierarchy such as there was in that standard, which that there d first consider vendor them to require - specific objective evidence (VSOE), then third party evidence and, finally, best estimate of selling price. In - addition , entities that had looked to legacy requirements in ASC 985 - 605 to develop their accounting policies no longer ne ed to establish VSOE based on a significant majority of their transactions. As a result, we expect that many entities will need to establish approaches to estimate their stand - alone selling prices. However, as these estimates may have limited underlying observable data, it is important for entities to have robust documentation to demonstrate the reasonableness of the calculations they make in estimating stand - alone selling prices . 6.1.3 Updating estimated stand - alone selling prices IFRS 15 does not specifically address how frequently estimated stand - alone selling prices must be updated. Instead, it indicates that an entity must make this estimate for each distinct good or service underlying each performance ith a customer , which suggests constantly updating obligation in a contract w prices. In practice, we anticipate that entities will be able to consider their own facts and circumstances in order to determine how frequently they will need to update their estimates the information used to estimate the . If, for example, stand - alone selling price for similar transactions has not changed, an entity may determine that it is reasonable to use the previously determined stand - alone selling price. However, in order for the changes in circumst ances to be reflected in the estimate in a timely manner, we anticipate that an entity would formally - update the estimate on a regular basis (e.g., monthly, quarterly, semi annually). The frequency of updates should be based on the facts and circumstances of the distinct good or service underlying each performance obligation for which the estimate is made. An entity uses current information each time it develops or updates its estimate. While the estimates may be updated, the approach used d - alone selling price does not change (i.e., an entity must use to estimate stan a consistent approach), unless facts and circumstances change. 6.1.4 Additional considerations for determining the stand - alone selling price (updated October 2018) While this is not explicitly stated in IFRS 15, we anticipate that a single good or service could have more than one stand - alone selling price. That is, the entity may be willing to sell goods or services at different prices to different customers. Furth ermore, an entity may use different prices in different geographies or in markets where it uses different methods to distribute its products (e.g., it may use a distributor or reseller, rather than selling directly customer s (e.g., different cost structures or to the end - ) or for other reason . Accordingly, an entity may need to stratify its strategies in different markets) analysis to determine its stand - alone selling price for each class of customer, geography and/or market, as applicable. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 217

218 Frequently asked questions - - alone selling price, does an entity Question 6 1: When estimating the stand have to consider its historical pricing for the sale of the good or service involved? Yes, we believe that an entity should consider its historical pricing in all circumstances, but it may not be determinative. Historical pricing is likely to be an important input as it may reflect both market conditions and entity - specific factors and ca n provide supporting evidence about the reasonableness of management’s estimate. For example, if management determines, based on its pricing policies and competition in the market, that the stand - alone selling price of its good or service is X, historical transactions within a reasonable range of X would provide supporting evidence for management’s estimate. However, if historical pricing was only 50% of X, this may indicate that historical pricing is no longer relevant due to changes in the market, for e xample, or that management’s estimate is flawed. Depending on the facts and circumstances, an entity may conclude that other factors such as internal pricing policies are more relevant to its determination of a stand - alone selling price. When historical pr icing has been established using the entity’s normal pricing policies and procedures, it is more likely that this information will be relevant in the estimation. If the entity has sold the product separately or has information on it is likely that a similar product, the entity would find competitors’ pricing for historical data relevant to its estimate of stand - alone selling prices, among other factors. In addition, we believe it may be appropriate for entities to stratify stand - alone selling prices based on: the type or size of customer; the amount of product or services purchased; the distribution channel; the geographic location; or other factors. Question 6 - 2: When using an expected cost plus margin approach to estimate a stand - alone selling price, ho w would an entity determine an appropriate margin? When an entity elects to use the expected cost plus margin approach, it is important for the entity to use an appropriate margin. Determining an appropriate margin may require the use of significant judgement and involve the consideration of many market conditions and entity specific - factors, discussed in s ection 6.1.1. For example, it would not be appropriate to determine that the entity’s estimate of stand - alone sell ing price is equivalent to cost plus a 30% margin if a review of market conditions demonstrates that customers are only willing to pay the equivalent of cost plus a 12% margin for a comparable product. Similarly, it would be inappropriate to determine tha t cost plus a specified margin represents the - stand alone selling price if competitors are selling a comparable product at twice the determined estimate. Furthermore, the determined margin ocations, may have to be adjusted for differences in products, geographic l customers and other factors. Updated October 2018 218 A closer look at IFRS 15, the revenue recognition standard

219 Frequently asked questions (cont’d) - 3: When estimating the stand Question 6 alone selling price of a good or - service, can an entity estimate a range of prices or does it have to identify a point estimate? Entities might use a range of prices to help estimate the stand - alone selling price of a good or service. We believe it is reasonable for an entity to use such a range for the purpose of assessing whether a stand - alone selling price (i.e., a single price) that the entity intends to use is reasonably within that range. That is, we do not believe that an entity is required to determine a point alone selling price if a range is a more estimate for each estimated stand - practical means of estimating the stand - one selling price for a good or al service. The objective of the standard is to allocate the transaction price to each performance obligation in “an amount that depicts the amount of consideration for which the entity expects to be entitled in exchange for transferring the promised good or service to the customer”. While the standard does not address ranges of estimates, using a range of prices would not be inconsistent with the objective of the standard. The only requirements in the standard are that an ent ity maximise its use of observable inputs and apply the estimation approaches consistently. Therefore, the use of a range would also be consistent with these principles. Practices we have observed include an entity establishing that a large portion within a narrow range (e.g., by reference of the stand - alone selling prices fall s to historical pricing). We believe the use of a narrow range is acceptable for determining estimates of stand alone selling prices under the standard - because it is consistent with the standard’s principle that an entity must maximise its use of observable inputs. - alone While the use of a range may be appropriate for estimating stand selling price, we believe that some approaches to identifying this range do not meet the requirement s of IFRS 15. For example, it would not be appropriate for an entity to determine a range by estimating a single price point for stand - alone selling price and then adding an arbitrary range on eit her side of that point estimate, nor would it be appropriate to take the historical prices the range around the midpoint until a significant portion of the and expand historical transactions fall within that band. The wider the range necessary to capture a high proportion of historical tran it sactions, the less relevant i s in terms of providing a useful data point for estimating stand - alone selling prices. specific factors could Management’s analysis of market conditions and entity - one selling price. support in determining the best estimate of the stand - al it The historical pricing data from transactions, while not necessarily determinative, could be used as supporting evidence for management’s conclusion. This is because it is consistent with the standard’s principle that mise its use of observable inputs. However, management an entity must maxi would need to analyse the transactions that fall outside the range to determine whether they have similar characteristics and, therefore, need to be evaluated as a separate class of transactions with a different estimated selling price. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 219

220 Frequently asked questions (cont’d) - alone If the entity has established a reasonable range for the estimated stand selling prices and the stated contractual price fell within that range, it may be appropriate to use the stated contractual price as the stand - alone selling price in the allocation calculation. However, if the stated contractual price for the good or service was outside of the range, the stand - alone selling price justed to a point within the established range in order to would need to be ad - allocate the transaction price on a relative stand alone selling price basis. In these situations, the entity would need to determine which point in the range is most appropriate to use (e.g., the midpoint of the range or the outer limit nearest to the stated contractual price) when performing the allocation calculation. Question 6 - 4: How should an entity evaluate a contract where the total transaction price exceeds the sum of the stand - alone selling prices? If the total transaction price exceeds the sum of the stand - alone selling prices emium for bundling the goods it may indicate that the customer is paying a pr or services in the contract. This situation is likely to be rare because most customers expect to receive a discount for purchasing a bundle of goods or - services. If a premium exists after determining the stand ices alone selling pr of each good or service, the entity needs to evaluate whether it properly identified both the estimated stand - alone selling prices (i.e., are they too low?) performance obligations in the contract. However, if and the number of the entity determines t hat a premium does, in fact, exist after this evaluation, we believe the entity would need to allocate the premium in a manner consistent with the standard’s allocation objective, which would typically be on a relative stand - alone selling price basis. .1.5 Measurement of options that are separate performance obligations 6 2018) (updated October An entity that determines that an option is a separate performance obligation (because the option provides the customer with a material right, as discussed s - alone selling price of the further in ection 4.6) needs to determine the stand option . f the optio n’s stand - alone selling price is not directly observable, the entity I estimates it. The estimate takes into consideration the discount the customer would receive in a stand alone transaction and the likelihood that the customer - nerally, option pricing models consider both would exercise the option. Ge the intrinsic value of the option (i.e., the value of the option if it were exercised today) and its time value (e.g., the option may be more or less valuable based on the amount of time until its expiration da te and/or the volatility of the price of the underlying good or service). An entity is only required to measure the when estimating the stand intrinsic value of the option under IFRS 15.B42 - alone selling price of the option he Board noted that . In the Basis for Conclusions, t the benefits of valuing the time value component of an option would not justify 223 ection 4.6) Example 49 in the standard (included in s the cost of doing so. illustrates the measurement of an option determined to be a material right er IFRS 15.B42. und IFRS 15.B43 provides an alternative to estimating the stand - alone selling price of an option. This practical alternative applies when the goods or services services in the contract (i.e., the are both: (1) similar to the original goods or 223 IFRS 15.BC390. Updated October 2018 220 A closer look at IFRS 15, the revenue recognition standard

221 224 entity continues to provide what it was already providing); and (2) provided in accordance with the terms of the original contract. The standard indicates that this alternative generally appl to options for contract renewals (i.e., the ies pproach). The Board stated in the Basis for Conclusions that renewal option a customer loyalty points and discount vouchers typically do not meet the above criteria for use of the practical alternative This is because customer loyalty . rede goods or services that may points and discount vouchers are emable for differ nature from those offered in the original contract and the terms of the in original contract do not restrict the pricing of the additional goods or services. For example, if an airline offers flights to customer s in exchange for points from its frequent flyer program me , the airline is not restricted because it can subsequently determine the number of points that are required to be redeemed 225 for any particular flight . Under this alternative, a portion of the tra nsaction price is allocated to the option (i.e., the material right that is a performance obligation) by reference to the total goods or services expected to be provided to the customer (including expected renewals) and the corresponding expected considera tion. That is, the total amount of consideration expected to be received from the customer (including consideration from expected renewals) is allocated to the total goods or services expected to be provided to the customer, including those from the expec ted contract renewals. The amount allocated to the goods or services that the entity is required to transfer to the customer under the contract (i.e., excluding the optional goods or services that will be transferred if the customer exercises the renewal option(s)) is then subtracted from the total amount of consideration received (or that will be received) for transferring those goods or services. The difference is the amount that is allocated to the option at contract inception. An entity using this alte rnative would need to apply the constraint on variable consideration (as discussed in s ection 5.2.3) to the estimated consideration for the optional goods or services prior to performing the allocation (see Illustration - 1, Scenario B below). 6 It is important to note that the calculation of total expected consideration (i.e., the hypothetical transaction price) , including consideration related to expected renewals, is only performed for the purpose of allocating a portion of nsaction price to the option at contract inception. It does the hypothetical tra not change the enforceable rights or obligations in the contract, nor does it affect the actual transaction price for the goods or services that the entity is presently obligated to transfer to th e customer (which would not include expected renewals). Accordingly, the entity would not include any remaining hypothetical transaction price in its disclosure of remaining performance obligations (see s ection 10.4.1). In this respect, the renewal option approach is consistent with 4.6) that, even if an entity may the conclusion in Question 4 - 1 3 (see s ection think that it is almost certain that a customer will exercise an option to buy additional goods services, an entity does not include the additional goods or or services underlying the option as promised goods or services (or performance obligations), unless there are substantive contractual penalties. Subsequent to contract inception, if the actual number of contract renewals is different from an enti ty’s initial expectations, the entity would update the hypothetical transaction price and allocation accordingly. However, as discussed in s ection 6.1, the estimate of the stand - alone selling prices at contract inception would not be updated. See Illustrat ion 6 - 1, Scenario B below for an example of how an entity could update its practical alternative calculation based on a change in expectations. 224 IFRS 15.BC394. 225 IFRS 15.BC394 and BC395. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 221

222 The following example illustrates the two possible approaches for measuring options included in a contract: ustration 6 1 — Measuring an option Ill - A machinery maintenance contract provider offers a promotion to new customers who pay full price for the first year of maintenance coverage that would grant them an option to renew their services for up to two years at a discount. The entity regularly sells maintenance coverage for CU750 per year. With the promotion, the customer would be able to renew the one - year maintenance at the end of each year for CU600. The entity concludes that the ability to renew is a materia l right because the customer would receive a discount that exceeds any discount available to other customers. The entity also determines that no directly observable stand - alone selling price exists for the option to renew at a discount. – Estim Scenario A - alone selling price of the option directly ate the stand (IFRS 15.B42) Since the entity has no directly observable evidence of the stand - alone selling price for the renewal option, it estimates the stand alone selling price of - an option for a CU150 discount on the renewal of service in years two and three. When developing its estimate, the entity would consider factors such as the likelihood that the option will be exercised and the price of comparable discounted offers. For exa mple, the entity may consider the selling price of an offer for a discounted price of similar services found on a ‘deal of the day’ website. - alone selling price The option will then be included in the relative stand allocation. In this example, there will - be two performance obligations: one year of maintenance services; and an option for discounted renewals. The consideration of CU750 is allocated between these two performance ive stand - alone selling prices. obligations based on their relat Example 49 in th e standard (included in s ection 4.6) illustrates the estimation of the stand alone selling price of an option determined to be a material right - under IFRS 15.B42. alone selling – Practical alternative to estimating the stand - Scenario B price of the option using the renewal option approach (IFRS 15.B43) If the entity chooses to use the renewal option approach, it would allocate the transaction price to the option for maintenance services by reference to the maintenance services expected to be provided (inc luding expected renewals) and the corresponding expected consideration. Since there is a discount offered on renewal of the maintenance service, this calculation will result in less revenue being allocated to the first year of the maintenance service whe n compared to the amount of consideration received for the first year of service (i.e., an amount less than CU750) . The difference between the consideration received (or that will be received) for the first year of maintenance service and the revenue all ocated to the first year of (i.e., CU750) will represent the amount allocated maintenance service to the option usi ng the renewal option approach. Updated October 2018 222 A closer look at IFRS 15, the revenue recognition standard

223 Illustration 6 - Measuring an option (cont’d) 1 — Assume the entity obtained 100 new customers under the promotion. Based on its experience, the entity anticipates approximately 50% attrition annually, after giving consideration to the anticipated effect that the CU150 discount entity considers the constraint on variable will have on attrition. The consideration and concludes that it is not highly probable that a significant revenue reversal will not occur. Therefore, the entity concludes that, for this portfolio of contracts, it will ultimately sell 175 contracts, each contract year of maintenance services (100 customers in the first year, providing one - 50 customers in the second year and 25 customers in the third year). The total consideration the entity expects to receive is CU120,000 [(100 x (i.e., the hypothetical transaction CU750) + (50 x CU600) + (25 x CU600)] price) . Assuming the stand alone selling price for each maintenance contract - period is the same, the entity allocates CU685.71 (CU120, 000/175) to each maintenance contract sold. During the first year, the entity will recognise revenue of CU68,571 maintenance service contracts sold x the allocated price of - year (100 one CU685.71 per maintenance service contract). Consequently, at contract inception, the entity would allocate CU6,429 to the option to renew CU68,571 revenue to be recognised in the (CU75,000 cash received – first year). If the actual renewals in years two and three differ from expectations, the t he hypothetical transaction price and allocation entity would have to update the beyond stating, s ection 6.1, that as discussed in accordingly. However, estimate of the stand - alone selling prices at contract inception would not be updated , the standard is not exp licit about how the en ity would update the hypothetical transaction price and allocation . Below is an illustration of how an entity could update its practical alternative calculation based on a change in expectations . For example, assume that the entity experiences less attrition than expected (e.g., 40% attrition annually, instead of 50%). Therefore, the year maintenance services - entity estimates that it will ultimately sell 196 one renewals after year one + 36 renewals after year two). Accordingly, (100 + 60 he total consideration that the entity expects to receive is CU132,600 [(100 x t CU750) + (60 x CU600) + (36 x CU600)] (i.e., the updated hypothetical transaction price). The entity would not update its estimates of the stand - alone selling prices (which were assumed to be the same for each maintenance period). As such, the entity allocates CU676.53 (CU132,600/196) to each T he entity would reduce the amount of revenue it maintenance period. recognises in year one by CU918 (CU68,571 – (100 x CU676.53)) because the amount allocated to the option would have been higher at contract inception. ed IFRS? from legacy What’s chang The requirement to identify and allocate contract consideration to an option (that has been d etermined to be a performance obligation) on a relative stand - alone selling price basis is likely to be a significant change in practice for many IFRS preparers. For entities that developed their accounting policy for allocation of revenue in an arrangemen t involving multiple goods or services by reference to legacy US GAAP, the requirements in IFRS 15 are generally consistent with the d 25 require - the 605 previous requirements in ASC 605 - 25. However, ASC A closer look at IFRS 15, the revenue recognition standard Updated October 2018 223

224 entity to estimate the selling price of the option (unless other objective evidence ed id not provide an alternative method (i.e., no of the selling price exist ) and d renewal option approach) for measuring the option. Frequently asked questions - 5 Question 6 versus a : Could the form of an option (e.g., a gift card coupon) affect how an option’s stand alone selling price is estimated? - We believe that the form of an option should not affect how the stand - alone selling price is estimated. Consider, for example, a retailer that gives customers who spend more t han CU100 during a specified period a CU15 discount on a future purchase in the form of a coupon or a gift card that expires two weeks from the sale date. If the retailer determines that this type of offer represents a material right (see ection 4.6), it will need to allocate s - alone a portion of the transaction price to the option on a relative stand selling price basis. As discussed in s ection 6.1, the standard requires that an entity first look to the retailer to any directly observable stand alone selling price. This require s - consider the nature of the underlying transaction. In this example, while a customer can purchase a CU15 gift card for its face value, that transaction is not the same in substance as a transaction in which the customer is given a CU15 gift card or coupon in connection with purchasing another good or service. As such, the retailer could conclude that there is no directly observable stand - alone selling price for a ‘free’ gift card or coupon obtained in connection with the purchase of another good or service. It would then need to estimate the stand - alone selling price in accordance with IFRS 15.B42. The estimated stand - alone selling price of an option given in the form of a gift card or a coupon would be the same because both estimates would reflect the likelihood that the option will be exercised (i.e., breakage, as ection 7.9). discussed in s Question 6 - Can an entity use the practical alternative when not all of the 6: ds or services in the original contract are subject to a renewal option? goo In certain instances, it might be appropriate to apply the practical alternative even if not all of the goods or services in the original contract are subject to renewal, provided th at the renewal is of a good or service that is similar to that included in the original contract and follows the renewal terms included in the original contract. Consider a contract to sell hardware and a service - type warranty whe tion to renew the warranty re the customer has the op only. Further more, assume that t he renewal option is determined to be a material right. If the terms of any future warranty renewals are consistent nable with the terms provided in the original contract, we believe it is reaso tha t the use of the practical alternative is allowed when allocating the of the renewal option. transaction price of the contract value Updated October 2018 224 A closer look at IFRS 15, the revenue recognition standard

225 6.2 Applying the relative stand - alone selling price method October (updated 2018) alone selling price for the separate - Once an entity has determined the stand or services in a contract, the entity allocates the transaction price goods o those performance obligations. The standard requires an entity to use t the relative stand alone sel ling price method to allocate the transaction price, - except in the two specific circumstances (variable consideration and discounts), which are described in s ections 6.3 and 6.4 below. Under the relative stand - alone selling price method, the transaction p rice is allocated to each performance obligation based on the proportion of the stand - alone selling price of each performance obligation to the sum of - alone selling prices of all of the performance obligations in the the stand Illustration 6 - 2 below: contract, as described in Illustration 6 - 2 — Relative stand - alone selling price allocation Manufacturing Co. entered into a contract with a customer to sell a machine for CU100,000. The total contract price included installation of the machine and a two - yea r extended warranty. Assume that Manufacturing Co. determined there were three performance obligations and the stand - alone selling prices of those performance obligations were as follows: machine — CU14,000 and extended wa CU75,000, installation services — — rranty CU20,000. - alone selling prices (CU109,000) exceeds the The aggregate of the stand total transaction price of CU100,000, indicating there is a discount inherent in the contract. That discount must be allocated to each of the individual performance obligations based on the relative stand - alone selling price of each performance obligation. Therefore, the amount of the CU100,000 transaction price is allocated to each performance obligation as follows: — CU68,807 (CU100,000 x (CU75,000/CU109,000)) Machine Installation CU12,844 (CU100,000 x (CU14,000/CU109,000)) — — Warranty CU18,349 (CU100,000 x (CU20,000/CU109,000)) The entity would recognise as revenue the amount allocated to each performance obligation when (or as) each performance obligation is satisfied. What’s chang ed from legacy IFRS? The method of allocation in IFRS 15 is not significantly different from were mentioned in IFRIC 13 to the mechanics of applying the methods that allocate consideration, such as a relative fair value approach. However, the methodology may be complicated when an entity applies one or both of the exceptions provided in IFRS 15 (described in s ections 6.3 and 6.4 below). In add ition, the standard is likely to require a change in practice for entities that d id not apply a relative allocation approach under legacy IFRS (e.g., entities the residual approach). ied appl that previously A closer look at IFRS 15, the revenue recognition standard Updated October 2018 225

226 Frequently asked questions - How should an entity allocate the transaction price in a Question 6 7: contract with multiple performance obligations in which the entity acts as both a principal and an agent? The standard does not illustrate the allocation of the transaction price for a contract with mul tiple performance obligations i n which the entity acts as both a principal and an agent (see section 4.4 for further discussion of principal versus agent considerations). We illustrate two acceptable ways to perform the allocation for this type of the contract that are consistent with s tandard’s objective for allocating the transaction price. Entities need to evaluate the facts and circumstances of their contracts to make sure that the allocation involving multiple performance obligations in which a n entity acts as both a principal and an agent meets the allocation objectives in IFRS 15. Illustration 6 Allocation when an entity is both a principal and an - 3 – agent in a contract i.e., Product A and Product B) to Entity X sells two distinct products ( , along with a distinct service for an aggregate con tract price Customer Y of CU 800. Entity X is the principal for the sale of Product A and Product B, but is an agent for the sale of the service. The stand - alone selling price of each good and service in the contract is as follows: Stand - alone Contract selling price CU 500 Product A 300 Product B 200 Service 1,000 Total party service provider Entity X earns a 20% commission from the third - the stand earns X based on That is, Entity - alone selling price of the service. 200 x 20%) and remits the remaining CU 160 CU40 of commission (i.e., CU to the third - party service provider. Method A – Entity X determines that it has provided a single discount of CU200 (i.e., sum of s tand - alone selling prices of CU1,000 less the contract price of CU800) on the bundle of goods and services sold to Customer Y in the contract (i.e., Products A and B and the service provided by the third - the goods and services in party). In order to allocate the discount to all of the contract, Entity X considers the performance obligation for the agency service as part of the contract with Customer Y for purposes of allocating - alone selling prices the transaction price. Entity X determines the stand oducts A and B and the agency service and allocates the transaction of Pr price of CU640 (i.e., CU800 contract price less CU160 to be remitted to the third service party service provider) for Products A and B and the - Updated October 2018 226 A closer look at IFRS 15, the revenue recognition standard

227 Frequently asked questions - – Allocation when an entity is both a principal and Illustration 6 3 (cont’d) an agent in a contract - alone selling price basis. This method is illustrated , as on a relative stand follows: Allocated Stand - alone transaction selling price price Contract CU CU 500 381 (500 ÷ 840 × 640) Product A 300 Product B (300 ÷ 840 × 640) 229 40 (40 ÷ 840 × 640) Service 30 840 Total 640 Entity X determines that it has provided a discount of CU200 - Method B on Products A and B since it is the principal for the transfer of those - goods to Customer Y. Entity X believes the third party service provider is a separate customer for its agency services and the commission Entity X expects to be entitled to receive for the agency service is not part of the transaction price in the contract with Customer Y. Entity X allocates a transaction price of CU600 (i.e., CU800 contract price less CU200 stand - alone selling price of service) to Product A and B on a relative stand - alone selling price basis. This method is illustrated , as follows: Allocated Stand - alone transaction selling price Contract 1 price CU CU 500 375 Product A (500 ÷ 800 × 600) 300 (300 ÷ 800 × 600) Product B 225 800 Total 600 The entity would separately recognise CU40 for its earned commission on the service contract when the performance obligation for the agency service has been satisfied. In either method, the same amount of revenue is ultimately recognised (i.e., CU640). However, the timing of revenue recognition would be different if the products and service are transferred to the agency customer at different times. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 227

228 6.3 Allocating (updated October 2018) variable consideration The relative stand - alone selling price method is the default method for allocating the transaction price. However, the Board noted in the Basis for Conclusion on IFRS 15 that this method may not always result i n a faithful depiction of the amount of consideration to which an entity expects to be 226 Therefore, the standard provides two exceptions entitled from the customer. to the relative selling price method of allocating the transaction price. The first relates to the allocation of variable consideration (see s ection 6.4 for the the second exception on allocation of a discount ). This exception requires variable consideration to be allocated entirely to a specific part of a contract, such as one or more (but not a (e.g., ll) performance obligations in the contract a bonus may be contingent on an entity transferring a promised good or service or one or more (but not all) distinct goods or within a specified period of time) services promised in a series of distinct g oods or services that form part of a single performance obligation (see s ection 4.2.2) (e.g . , the consideration promised for the second year of a two - year cleaning service contract will increase on the basis of movements in a specified inflation index) . as follows: Two criteria must be met to apply this exception, Extract from IFRS 15 85. An entity shall allocate a variable amount (and subsequent changes to that amount) entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation in accordance he following criteria are met: with paragraph 22(b) if both of t (a) t he terms of a variable payment relate specifically to the entity’s efforts to satisfy the performance obligation or transfer the distinct good or service (or to a specific outcome from satisfying the performance obligation or transferring the distinct good or service); and (b) a llocating the variable amount of consideration entirely to the performance obligation or the distinct good or service is consistent with the allocation objective in paragraph 73 when considering all of the performance obligations and payment terms in the contract. – 86. The allocation requirements in paragraphs 73 83 shall be applied to allocate the remaining amount of the transaction price that does not meet the criteria in paragraph 85. While the lang uage in IFRS 15.85 in the extract above implies that this exception is limited to allocating variable consideration to a single performance obligation or a single distinct good or service within a series, IFRS 15.84 indicates that the variable consideratio n can be allocated to ’one or more, but not all’, performance obligations or distinct goods or services within a series. We understand it was not the Board’s intent to limit this exception to a single rvice within a series, performance obligation or a single distinct good or se even though the standard uses a singular construction for the remainder of the discussion and does not repeat ‘one or more, but not all’. The Board noted in the Basis for Conclusions that this exception is necessary because allocating contingent amounts to all performance obligations in 227 a contract may not reflect the economics of a transaction in all cases. Allocating variable consideratio n entirely to a distinct good or service may be appropriate when the result is that the amount allocated to that particular 226 IFRS 15.BC280. 227 IFRS 15.BC278. Updated October 2018 228 A closer look at IFRS 15, the revenue recognition standard

229 good or service is reasonable relative to all other performance obligations and payment terms in the contract. Subsequent changes in variable consideration must be allocated in a consistent manner. Entities may need to exercise significant judgement to determine whether they meet the requirements to allocate variable consideration to specific performance obligations or distinct good s or services within a series. Firstly, entities need to determine whether they meet the first criterion in IFRS 15.85, which requires the terms of a variable payment to specifically relate to an entity’s efforts to satisfy a performance obligation or tran sfer a distinct good or service that is part of a series. In performing this assessment, an entity needs to consider the nature of its promise and how the performance obligation has been defined. In addition, the entity needs to clearly understand the var iable payment terms and how those payment terms align with the entity’s promise. This includes evaluating any clawbacks or potential adjustments to the variable its payment. For example, an entity may conclude that the nature of promise in a contract is to provide hotel management services (including management of and ) , etc. the hotel employees, accounting services, training, that procurement a series of distinct services (i.e., daily hotel management). For comprise providing this service, the entity receiv es a variable fee based on a percentage of occupancy rates. It is likely that t he entity would determine that it meets the first criterion to allocate the daily variable fee to the distinct service performed that day because the uncertainty related to the consideration is resolved on a daily basis as the entity satisfies its obligation to perform daily hotel management services. This is because the variable payments specifically relate t goods or distinct service that is part of a series of distinc to transferring the The fact that the payments do not services (i.e., the daily management service). directly correlate with each of the underlying activities performed each day does not affect this assessment. Refer to 4 for further discussion of section ng the nature of the goods identifyi services promised in a contract, including or whether they meet the series requirement. In contrast, consider an entity that has a contract to sell equipment and maintenance services for that equipment. The maintenance services have been determined to be a series of distinct services because the customer benefits from the entity standing ready to perform in case the equipment breaks down. The consideration for the maintenance services is based on usage of the equipment and is , th erefore , variable. In this example, the payment terms do not align with the nature of the entity’s promise. This is because the payment terms are usage - based , but the nature of the entity’s promise is to stand ready each day to perform any maintenance may be needed , regardless of that how much the customer uses the equipment. the entity does not meet Since the criteria to apply the allocation exception, it must estimate the variable consideration over the life of the contract, including consideration of t he cons traint. The entity would then recognis e revenue based on its selected measure of progress (see section 7.1.4). Secondly, entities need to determine whether they meet the second criterion in IFRS 15.85; to confirm that allocating the consideration i n this manner is consistent with the overall allocation objective of the standard in IFRS 15.73. That is, an entity should allocate to each performance obligation (or distinct good or service in a series) the portion of the transaction price that reflects the amount of consideration the entity expects to be entitled in exchange for transferring those goods or services to the customer. with different variable payment The TRG discussed four types of contracts terms that may be accounted for as series of dist inct goods or services (see ection 4.2.2) and for which an entity may reasonably conclude that the s A closer look at IFRS 15, the revenue recognition standard Updated October 2018 229

230 allocation objective has been met (and the variable consideration could be allocated to each distinct period of service, such as day, month or year) as 228 ows: foll • – The TRG agenda paper included an IT outsourcing Declining prices contract in which the events that trigger the variable consideration are the same throughout the contract, but the per unit price declines over the life . T he allocation objective could be met if the pricing is based of the contract a benchmarking clause) or on market terms (e.g., if the contract contains the changes in price are substantive and linked to changes in an entity’s cost to fulfil the obligation or value provided to the customer. Consistent fixed prices – • The TRG agenda paper included a t ransaction processing contract with unknown quantity of transactions, but a fixed an contractual rate per transaction . T he allocation objective could be met if the fees are priced consistently throughout the contract and the rates charged are consistent with the entity’s standard pricing practices with similar customers. • Consistent variable fees, cost reimb ursements and incentive fees – The TRG nt contract in which monthly agenda paper included a h otel manageme consideration is based on a percentage of monthly rental revenue, reimbursement of labour costs . T he and an annual incentive payment allocation objective could be met for each payment stream as follows. The base monthly fees c ould meet the allocation objective if the consistent measure throughout the contract period (e.g., 1% of monthly rental revenue) reflects the value to the customer. The cost reimbursements could meet the allocation objective if they are commensurate with an entity’s efforts to fulfil the promise each day. The annual incentive fee could also meet the allocation objective if it reflects the value delivered to the customer for the annual period and is reasonable compared with incentive fees that could be ea rned in other periods. – Sales - based and usage - based royalty • The TRG agenda paper included a f - based royalty ranchise agreement in which franchisor will receive a sales . of 5% in addition to a fixed fee he allocation objective could be met if T the consis tent formula throughout the licence term reasonably reflects the value to the customer of its access to the franchisor’s intellectual property (e.g., reflected by the sales that have been generated by the customer). It is important to note that allocating variable consideration to one or more, but not all, performance obligations or distinct goods or services in a series is a requirement, not a policy choice. If the above criteria are met, the entity must allocate the variable consideration to the related performance obligation(s). 228 TRG Agenda paper no. 39, Application of the Series Provision and Allocation of Variable 13 July 2015. , dated Consideration Updated October 2018 230 A closer look at IFRS 15, the revenue recognition standard

231 The standard provides the following example to illustrate when an entity may or may not be able to allocate variable consideration to a specific part of a contract. Note that the example focuses on licences of intellectual pro perty, which are discussed in section 8: Extract from IFRS 15 Example 35 — Allocation of variable consideration (IFRS 15.IE178 - IE187) An entity enters into a contract with a customer for two intellectual property licences (Licences X and Y), which the entity determines to represent two performance obligations each satisfied at a point in time. The stand - alone selling prices of Licences X and Y are C U800 and CU1,000, respectively. — Case A Variable consideration allocated entirely to one performance obligation The price stated in the contract for Licence X is a fixed amount of CU800 and for Licence Y the consideration is three per cent of the customer’s future sales of products that use Licence Y. For purposes of allocation, the entity sales - based royalties (ie the variable consideration) to be estimates its CU1,000, in accordance with paragraph 53 of IFRS 15. To allocate the transaction price, the entity considers the criteria in paragraph 85 of IFRS 15 and concludes that the variable consideration based royalties) should be allocated entirely to Licence Y. (ie the sales - The entity concludes that the criteria in paragraph 85 of IFRS 15 are met for the following reasons: (a) The variable payment relates specifically to an outcome from the performance o bligation to transfer Licence Y (ie the customer’s subsequent sales of products that use Licence Y). (b) Allocating the expected royalty amounts of CU1,000 entirely to Licence Y is consistent with the allocation objective in paragraph 73 of IFRS 15. This is b ecause the entity’s estimate of the amount of sales - based royalties (CU1,000) approximates the stand - alone selling price of Licence Y and the fixed amount of CU800 approximates the stand - alone selling price of Licence X. The entity allocates CU800 to Licen ce X in accordance with paragraph 86 of IFRS 15. This is because, based on an assessment of the facts and circumstances relating to both licences, allocating to Licence Y some of the fixed consideration in addition to all of the variable consideration wo uld not meet the allocation objective in paragraph 73 of IFRS 15. The entity transfers Licence Y at inception of the contract and transfers Licence X one month later. Upon the transfer of Licence Y, the entity does not recognise revenue because the consideration allocated to Licence Y is in the form of a sales - based roy alty. Therefore, in accordance with - B63 of IFRS 15, the entity recognises revenue for the sales paragraph based royalty when those subsequent sales occur. e CU800 When Licence X is transferred, the entity recognises as revenue th allocated to Licence X. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 231

232 Extract from IFRS 15 (cont’d) Variable consideration allocated on the basis of stand - alone selling Case B — prices The price stated in the contract for Licence X is a fixed amount of CU300 r’s future and for Licence Y the consideration is five per cent of the custome - based sales of products that use Licence Y. The entity’s estimate of the sales royalties (ie the variable consideration) is CU1,500 in accordance with paragraph 53 of IFRS 15. To allocate the transaction price, the entity applies the criteria in paragraph 85 of IFRS 15 to determine whether to allocate the variable consideration (ie the sales based royalties) entirely to Licence Y. In applying - the criteria, the entity concludes that even though the variable payments relate specifically to an outco me from the performance obligation to transfer Licence Y (ie the customer’s subsequent sales of products that use Licence Y), allocating the variable consideration entirely to Licence Y would be inconsistent with the principle for allocating the transact ion price. Allocating CU300 to Licence X and CU1,500 to Licence Y does not reflect a reasonable allocation of the transaction price on the basis of the stand - alone selling prices of Licences X and Y of CU800 and CU1,000, respectively. Consequently, the ent ity applies the general allocation requirements in paragraphs 76 15. – 80 of IFRS The entity allocates the transaction price of CU300 to Licences X and Y alone selling prices of CU800 and CU1,000, on the basis of relative stand - respectively. The entity also allocates the consideration related to the sales - alone selling price basis. However, in - based royalty on a relative stand accordance with paragraph B63 of IFRS 15, when an entity licenses a sales intellectual property in which the consideration is in the form of based - royalty, the entity cannot recognise revenue until the later of the following events: the subsequent sales occur or the performance obligation is satisfied (or partially satisfied). the contract and Licence Y is transferred to the customer at the inception of Licence X is transferred three months later. When Licence Y is transferred, the entity recognises as revenue the CU167 (CU1,000 ÷ CU1,800 × CU300) allocated to Licence Y. When Licence X is transferred, the entity recognises as revenue th e CU133 (CU800 ÷ CU1,800 × CU300) allocated to Licence X. In the first month, the royalty due from the customer’s first month of sales is CU200. Consequently, in accordance with paragraph B63 of IFRS 15, the entity recognises as revenue the CU111 (CU1,000 ÷ CU1,800 × CU200) allocated to Licence Y (which has been transferred to the customer and is therefore a satisfied performance obligation). The entity recognises a ÷ CU1,800 × CU200) allocated to contract liability for the CU89 (CU800 Licence X. This is because although the subsequent sale by the entity’s customer has occurred, the performance obligation to which the royalty has been allocated has not been satisfied. Updated October 2018 232 A closer look at IFRS 15, the revenue recognition standard

233 Frequently asked questions 8 Question 6 : In order to meet the criteria to allocate variable consideration - entirely to a specific part of a contract, must the allocation be made on - alone selling price basis? [TRG meeting 13 July 2015 a relative stand – Agenda paper no. 39] - alone selling price No. TRG members generally agreed that a relative stand allocation is not required to meet the allocation objective when it relates to the allocation of variable consideration to a specific part of a contract (e.g., n a series). The Basis for Conclusions notes that a distinct good or service i stand - alone selling price is the default method for meeting the allocation objective, but other methods could be used in certain instances (e.g., in 229 allocating variable consideration). takeholders had que stioned whether the variable consideration exception S would have limited application to a series of distinct goods or services (see s they wanted to know whether the standard would ection 4.2.2) . That is, require that each distinct service that is substantially the same be allocated the same amount (absolute value) of variable consideration. While the standard does not state what other allocation methods could be used beyond - alone selling price basis, TRG members generally agreed the relative stand that an entity would apply reasonable judgement to determine whether the allocation results in a reasonable outcome (and, therefore, meets the n the standard), as discussed above in s ection 6.3. allocation objective i 6.4 Allocating a discount The second exception to the relative stand - alone selling price allocation (see s ection 6.3 for the first exception) relates to discounts inherent in contracts. When an entity se lls a bundle of goods or services, the selling price of the bundle is often less than the sum of the stand - alone selling prices of - the individual elements. Under the relative stand alone selling price allocation method, this discount would be allocated p roportionately to all of the separate performance obligations. However, the standard states that if an entity determines that a discount in a contract is not related to all of the promised goods or services in the contract, the entity allocates the contrac t’s entire , if all of the following discount only to the goods or services to which it relates criteria are met: Extract from IFRS 15 82. An entity shall allocate a discount entirely to one or more, but not all, performance obligations in the contract if all of the following criteria are met: t he entity regularly sells each distinct good or service (or each bundle of (a) distinct goods or s ervices) in the contract on a stand - alone basis; (b) he entity also regularly sells on a stand - alone basis a bundle (or bundles) t - of some of those distinct goods or services at a discount to the stand alone selling prices of the goods or services in each bundl e; and (c) t he discount attributable to each bundle of goods or services described in paragraph 82(b) is substantially the same as the discount in the contract and an analysis of the goods or services in each bundle provides observable evidence of the performa nce obligation (or performance obligations) to which the entire discount in the contract belongs. 229 BC280. - IFRS 15.BC279 A closer look at IFRS 15, the revenue recognition standard Updated October 2018 233

234 A n entity this exception when the price would determine whether it can apply in of certain goods or services is largely independent of other goods or services the contract. In these situations, an entity would be able to effectively ’carve of the performance out’ an individual performance obligation, or some discount to that obligations in the contract, and allocate the contract’s entire performance obligati on or group of performance obligations, provided the above criteria are met. However, an entity could not use this exception to allocate only a portion of the discount to one or more, but not all, performance obligations in the contract. the Basis for Conclusions that it believes the requirements The IASB noted in ies to contracts that include at least three in IFRS 15.82 generally appl While the standard contemplates that an entity may performance obligations. allocate the entire discount to as few as one performance obligation, the Board 230 Instead, the further clarified that it believes such a situation would be rare. Board believes it is more likely that an entity will be able to demonstrate that a discount relates to two or more performance obligations. This is because an is likely entity to have observable information that the stand - alone selling price of a group of promised goods or services is lower than the price of those items when sold separately. It be more difficult for an entity to have suff icient may evidence to demonstrate that a discount is associated with a single performance obligation. When an entity applies a discount to one or more performance obligations in accordance with the above criteria, the standard states that the discount is all ocated first before using the residual approach to estimate 231 the stand - alone selling price of a good or service (see s ection 6.1.2). The standard includes the following example to illustrate this exception and when the use of the residual approach for estimating stand alone selling prices - : may or may not be appropriate Extract from IFRS 15 — Example 34 Allocating a discount (IFRS 15.IE167 - IE177) An entity regularly sells Products A, B and C individually, thereby establishing the following stand - alone selling prices: Product Stand - alone selling price CU Product A 40 Product B 55 45 Product C Total 140 In addition, the entity regularly sells Products B and C together for CU60. Case A — Allocating a discount to one or more performance obligations The entity enters into a contract with a customer to sell Products A, B and C in exchange for CU100. The entity will satisfy the performance obligations for each of the produc ts at different points in time. 230 IFRS 15.BC283. 231 IFRS 15.83. Updated October 2018 234 A closer look at IFRS 15, the revenue recognition standard

235 Extract from IFRS 15 (cont’d) The contract includes a discount of CU40 on the overall transaction, which would be allocated proportionately to all three performance obligations when allocating the transaction price using the relative stand - alone selling price paragraph 81 of IFRS 15). However, because method (in accordance with entity regularly sells Products B and C together for CU60 and Product A the CU40, it has evidence that the entire discount should be allocated to the for promises to transfer Products B and C in accordance with paragraph 82 of IFRS 15. If the entity transfers control of Products B and C at the same point in time, then the entity could, as a practical matter, account for the transfer of those products as a single performance obligation. That is, the entity could allocate CU60 of the trans action price to the single performance obligation and recognise revenue of CU60 when Products B and C simultaneously transfer to the customer. If the contract requires the entity to transfer control of Products B and C at different points in time, then th e allocated amount of CU60 is individually allocated to the promises to transfer Product B (stand - alone selling price of CU55) and Product C (stand - alone selling price of CU45) as follows: Product Allocated transaction price CU - alone selling price × Product B 33 (CU55 ÷ CU100 total stand CU60) 27 Product C - alone selling price × (CU45 ÷ CU100 total stand CU60) Total 60 Case B — Residual approach is appropriate The entity enters into a contract with a customer to sell Products A, B and C as described in Case A. The contract also includes a promise to transfer Product alone D. Total consideration in the contract is CU130. The stand - selling price for Product D is h ighly variable (see paragraph 79(c) of IFRS 15) because the entity sells Product D to different customers for a broad range of amounts (CU15 – CU45). Consequently, the entity decides to estimate the stand - alone selling price of Product D using the residual approach. Before estimating the stand - alone selling price of Product D using the residual approach, the entity determines whether any discount should be allocated to the other performance obligations in the contract in accordance with paragraphs 82 and 83 of IFRS 15. As in Case A, because the entity regularly sells Products B and C together for CU60 and Product A for CU40, it has observable evidence that CU100 should be allocated to those three products and a CU40 discount should be allocated to the promis es to transfer Products B and C in accordance with paragraph 82 of IFRS 15. Using the residual approach, the entity estimates A closer look at IFRS 15, the revenue recognition standard Updated October 2018 235

236 Extract from IFRS 15 (cont’d) - alone selling price of Product D to be CU30 as follows: the stand Sta nd - alone selling Product price Method CU Product A 40 Directly observable (see paragraph 77 of IFRS 15) Products B 60 Directly observable with discount (see paragraph 82 of IFRS 15) and C Product D 30 Residual approach (see paragraph 79(c) of IFRS 15) Total 130 The entity observes that the resulting CU30 allocated to Product D is within – CU45). Therefore, the the range of its observable selling prices (CU15 resulting allocation (see above table) is consistent with the allocation d the requirements in paragraph 78 objective in paragraph 73 of IFRS 15 an of IFRS 15. Case C — Residual approach is inappropriate The same facts as in Case B apply to Case C except the transaction price is CU105 instead of CU130. Consequently, the application of the residual approach would result - alone selling price of CU5 for Product D in a stand (CU105 transaction price less CU100 allocated to Products A, B and C). The entity concludes that CU5 would not faithfully depict the amount of exchange for consideration to which the entity expects to be entitled in satisfying its performance obligation to transfer Product D, because CU5 does not approximate the stand - alone selling price of Product D, which ranges from CU15 – CU45. Consequently, the entity reviews its observable data, including sales and m argin reports, to estimate the stand - alone selling price of Product D using another suitable method. The entity allocates the transaction price of CU105 to Products A, B, C and D using the relative stand - alone selling prices of those products in accordance with paragraphs 73 – 80 of IFRS 15. What’s chang ed from legacy IFRS? The ability to allocate a discount to some, but not all, performance obligations within a contract is a significant change from previous practice. This exception gives entities the ability to better reflect the economics of the transaction in certain circumstances. However, the criteria that must be met to demonstrate that a discount is associated with only some of the performance obligatio ns in are eligible for this limit the number of transactions that the contract is likely to exception. Updated October 2018 236 A closer look at IFRS 15, the revenue recognition standard

237 Frequently asked questions - 9 Question 6 : If a discount also meets the definition of variable contingent on a future consideration because it is variable in amount and/or event), which allocation exception would an entity apply? [TRG meeting 30 – Agenda paper no. 31] March 2015 TRG members generally agreed that an entity will first determine whether a variable discount meets the variable consideration s ection 6.3 exception (see 232 above). If it does not, the entity then consider s whether it meets the discount exception (see s ection 6.4 above). In reaching that conclusion, the TRG agenda paper noted that IFRS 15.86 establishes a hierarchy for allocating variable consideration that requires an entity to identify variable consideration and then determine whether it should allocate variable consideration to one or some, but not all, performance obligations (or distinct goods or services that comprise a singl e performance obligation) based on the exception for allocating variable consideration. The entity would consider the requirements for allocating a discount only if the discount is not variable consideration (i.e., the amount of the discount is fixed and n ot contingent on future events) or the entity does not meet the criteria to allocate variable consideration to a specific part of the contract. 6.5 Changes in transaction price after contract inception (updated October 2018) The standard requires entities to determine the transaction price at contract inception. How ever, there could be changes to the transaction price after contract inception. For example, as discussed in section 5.2.4, when a contract to update their estimate of the includes variable consideration, entities need transaction price at the end of each reporting period to reflect any changes in circumstances. Changes in the transaction price can also occur due to contract modifications (see section 3.4). - 89, c ha As stated in IFRS 15.88 nges in the total transaction price are generally allocated to the performance obligations on the same basis as the initial allocation, whether they are allocated based on the relative stand - alone selling price (i.e., using the same proportionate share of the total) or to individual performance obligations under the variable consideration exception discussed s ection 6.3. Amounts allocated to a satisfied in performance obligation should be recognised as revenue, or a reduction in revenue, in the period that the transaction price changes. - As discussed in s ection 6.1, stand alone selling prices are not updated after contract inception, unless the contract has been modified. more , any Further ligations amounts allocated to satisfied (or partially satisfied) performance ob should b ed in revenue in the period in which the transaction price e recognis changes (i.e., on a cumulative catch - up basis). This could result in either an increase or decrease to revenue in relation to a satisfied performance obligation o r to cu mulative revenue recognis ed for a partially satisfied over time performance obligation (see section 7.1). If the change in the transaction price is due to a contract modification, the contract modification requirements in IFRS 15.18 - 21 must be followed (s ee s ection 3.4 for a discussion on contract modifications). 232 IFRS 15.86. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 237

238 However, when contracts include variable consideration, it is possible that changes in the transaction price that arise after a modification may (or may not) that existed before the modification. For be related to performance obligations changes in the transaction price arising after a contract modification that is not treated as a separate contract, an entity must apply one of the two approaches : to an amount of variable If the change in transaction price is attributable • consideration promised before the modification and the modification was considered a termination of the existing contract and the creation of a new contract, the entity allocates the change in transaction price to e obligations that existed before the modification. the performanc In all other cases, the change in the transaction price is allocated to the • performance obligations in the modified contract (i.e., the performance obligations that were unsatisfied and partially unsatisfied immediately after the modification). The first approach is applicable to a change in transaction price that occurs after a contract modification that is accounted for in accordance with 15.21 (a) (i.e., as a termination of the existing con tract and IFRS the creation of a new contract) and the change in the transaction price is attributable to variable consideration promised before the modification. For example, an estimate of variable consideration in the initial contract may have changed or ma y no longer be constrained. In this scenario, the Board decided that an entity should allocate the corresponding change in the transaction price to the performance obligations identified in the contract before the modification , including performance obligations that were (e.g., the original contract) 233 satisfied prior to the modification. That is, it would not be appropriate for an entity to allocate the corresponding change in the transaction price to the performance obligations that are in the modified c ontract if the promised variable consideration ( and the resolution of the associated uncertainty ) were not affected by the contract modification. The second approach (i.e., IFRS 15.90 (b)) is applicable in all other cases when a modification is not treate d as a separate contract (e.g., when the change in the transaction price is not attributable to variable consideration promised before the modification). 6.6 Allocation of transaction price to components outside the scope of IFRS 15 (updated October 2018) Revenue arrangements frequently contain multiple elements, including some components that are not within the scope of IFRS 15. As discussed further in s ection 2.4, the standard indicates that in such situations, an entity must first apply the other standards if those standards address separation and/or measurement. For example, some standards require certain components, such as financial liabilities , to be accounted for at fair value. As a result, when a revenue contract includes that type of component, the fair value of that component must be separated from the total transaction price. The remaining transaction price is then allocated to the remaining p erformance obligations. 233 .BC83 IFRS 15 . Updated October 2018 238 A closer look at IFRS 15, the revenue recognition standard

239 The following example illustrates this concept: 4 — Arrangements with components outside the scope of - Illustration 6 the standard Retailer sells products to customers and often bundles them with prepaid gift cards when the custom er buys multiple units of its products. Its prepaid - refundable, non - redeemable and non - exchangeable for gift cards are non - end fees. That is, any remaining cash and do not have an expiry date or back balance on the prepaid gift cards does not reduce, unles s it is spent by - party the customer. Customers can redeem prepaid gift cards only at third merchants specified by Retailer (i.e., the prepaid gift card cannot be redeemed at the Retailer) in exchange for goods or services up to a specifed amount. monetary When a customer uses the prepaid gift cards at a merchant(s) to purchase goods or services, Retailer delivers cash to the merchant(s). Customer X enters into a contract to purchase 100 units of a product and f CU1,000. Because it bought a prepaid gift card for total consideration o - 100 units, Retailer gives Customer X a discount on the bundle. The stand alone selling price of the product and the fair value of the prepaid gift card are CU950 and CU200, respectively. Analysis Retailer determines that it h as a contractual obligation to deliver cash to specified merchants on behalf of the prepaid gift card owner (Customer X) and that this obligation is conditional upon Customer X using the prepaid gift card to purchase goods or services. Also, Retailer does not have an unconditional right to avoid delivering cash to settle this contractual obligation. Therefore, Retailer concludes that the liability for this prepaid gift card meets the definition of a financial liability and applies the requirements in IFRS 9 to account for it. In accordance with IFRS 15.7, because IFRS 9 provides measurement requirements for initial recognition (i.e., requires financial liabilities in its scope be initially recognised at fair value), that with Retailer excludes from the IFRS 15 transaction price the fair value of the gift card . Retailer allocates the remaining transaction price to the prepaid , as . The allocation of the total transaction price is products purchased follows: Arrangement Selling price % Allocated Allocated consideration discount and fair value discount allocation Products (100 units) 100% CU 9 50 00 CU150 C8 Prepaid g ift card C U2 00 0% — CU2 00 CU1,1150 CU150 CU1,000 For components that must be recognised at fair value at inception, any 9). subsequent remeasurement would be pursuant to other IFRSs (e.g., IFRS That is, subsequent adjustments to the fair value of those components have saction price previously allocated to any no effect on the amount of the tran performance obligations included within the contract or on revenue recognised. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 239

240 7. Satisfaction of performance obligations Under IFRS 15, an entity only recognises revenue when it satisfies an identified e obligation by transferring a promised good or service to a performanc customer. A good or service is considered to be transferred when the customer obtains control. 15 states that “control of an asset refers to the ability to direct the use of IFRS 234 substantially all of the remaining benefits from the asset”. and obtain Control also means the ability to prevent others from directing the use of, and The Board noted that both goods receiving the benefit from, a good or service. omer acquires (even if many services are not and services are assets that a cust recognised as an asset because those services are simultaneously received and 235 The IASB consumed by the customer). explained the key terms in the definition 236 of control in the Basis for Conclusions, as follows: Ability • — a customer must have the present right to direct the use of, and obtain substantially all of the remaining benefits from, an asset for an entity to recognise revenue. For example, in a contract that requires a manufacturer to produce an asset for a customer, it might be clear that will ultimately have the right to direct the use of, and obtain the customer substantially all of the remaining benefits from, the asset. However, the entity should not recognise revenue until the customer has actual ly obtained that right (which, depending on the contract, may occur during production or afterwards). • — a customer’s ability to direct the use of an asset refers Direct the use of to the customer’s right to deploy or to allow another entity to deploy that asset in its activities or to restrict another entity from deploying that asset. • — the customer must have the ability to obtain Obtain the benefits from substantially all of the remaining benefits from an asset for the customer to obtain control of it. C onceptually, the benefits from a good or service are potential cash flows (either an increase in cash inflows or a decrease in cash outflows). IFRS 15.33 indicates that a customer can obtain the benefits directly or indirectly in many ways, such as usin g the asset to : produce goods or services (including public services); using the asset to enhance the value of other assets; using the asset to settle a liability or reduce an expense; selling or exchanging the asset; pledging the asset to secure a loan; or holding the asset . Under IFRS 15, the transfer of control to the customer represents the transfer of the rights with regard to the good or service. The customer’s ability to receive the benefit from the good or service is represented by its right to antially all of the cash inflows, or the reduction of the cash outflows, subst generated by the goods or services. Upon transfer of control, the customer the remainder has sole possession of the right to use the good or service for of its economic life or to consume the good or service in its own operations. The IASB explained in the Basis for Conclusions that control should be assessed primarily from the customer’s perspective. While a seller often surrenders control at the same time the customer obtains con trol, the Board required the assessment of control to be from the customer’s perspective to minimise the risk 234 IFRS 15.33. 235 IFRS 15.BC118. 236 15.BC120. IFRS Updated October 2018 240 A closer look at IFRS 15, the revenue recognition standard

241 of an entity recognising revenue from activities that do not coincide with the 237 transfer of goods or services to the customer. tes that an entity must determine, at contract inception, The standard indica whether it will transfer control of a promised good or service over time. If an entity does not satisfy a performance obligation over time, the performance 238 . obligation is satisfied at a point in time These concepts are explored further in the following sections. 7.1 Performance obligations satisfied over time (updated October 2018) Frequently, entities transfer the promised goods services to the customer or over time. While the determination of whet her goods or services are transferred over time is straightforward in some contracts (e.g., many service contracts), it is more difficult in other contracts . IFRS 15.35 states that an entity transfers control of a good or service over time ollowing criteria if one of the f : is met • As the entity performs, the customer simultaneously receives and consumes the benefits provided by the entity’s performance. • The entity’s performance creates or enhances an asset (e.g., work in progress) that the customer controls as the asset is created or enhanced. • 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. Examples of each of the criteria above are included in the following sections. If an entity is unable to demonstrate that control transfers over time, the presumption is that control transfers at a point in time (see s ection 7.2). 237 IFRS 15.BC121. 238 IFRS 15.32. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 241

242 The following flow char t illustrates how to evaluate whether control transf ers over time: Yes Does the customer simultaneously receive and consume the benefits provided by the entity’s performance as the entity performs (see section 7.1.1)? No rmance create or Does the entity’s perfo The entity transfers control of a Yes enhance an asset that the customer good or service over time (and controls as the asset is created or es revenue over time). recognis enhanced (see section 7.1.2)? No performance create an Does the entity’s asset with no alternative use to the entity Yes AND the entity has enforceable right to payment for performance completed to date (see section 7.1.3)? No The entity transfers control of a good or service at a point in time (and recognises revenue at a point in time). ed from What’s chang legacy IFRS? For each performance obligation identified in the contract, an entity is required to consider at contract inception whether it satisfies the performance obligation whether it meets one time over time (i.e., - of the three criteria for over recognition) or at a point in time. This evaluation require s entities to perform under IFRS. For example, what they differ from might did analyses that legacy entities that enter into contracts to construct real estate for a customer no whether the contract either meets the definition longer need to determine of a construction contract (in order to apply IAS 11) or is for the provision of vices (under IAS 18) so as to recognise revenue over time. Instead, under ser is IFRS 15, an entity needs to determine whether its performance obligation ing the three criteria for over satisfied over time by evaluat - time recognition. If sfy a performance obligation over time, the performance an entity does not sati obligation is satisfied at a point in time. Updated October 2018 242 A closer look at IFRS 15, the revenue recognition standard

243 Frequently asked questions - 1 Can an entity that recognis ed revenue at a point in time under : Question 7 be required to recognis e revenue over time under legacy standards 15 ? [FASB TRG meeting 7 November 2016 - Agenda paper no. 56] IFRS FASB TRG members generally agreed that revenue an entity that recognised legacy revenue standards need s to analyse each of its at a point in time under is contracts to determine whether it required to recognise revenue over time under the standard. That is, an entity that recognise d revenue at a point in time under legacy standards should not presume it recognises revenue at a poi nt in time under IFRS 15 and should assess the facts and circumstances of each of its contracts based on the requirements of IFRS 15. An entity recognis - time criteria es revenue at a point in time if it does not meet the over in the standard . of An example a transaction in which an entity might have a change in recognition timing is a contract manufacturer that produces goods designed to a customer’s unique specifications and can reasonably conclude that the goods do not have an alternative use. If the manu facturer also has an enforceable r completed to date, it would ight to payment for performance meet the standard’ s third criterion to recognise revenue over time, even though it might have recognise d reve nue at a point in time under legacy IFRS mber of units produced or units (e.g., base d on the nu delivered). However, a reassessment of the timing and pattern of revenue recognition is not limited to contracts that were recognised at a point in time under legacy ir contracts to determine standards. Entities have to analyse each of the the appropriate timing and pattern of recognition, considering the specific criteria and requirements of the standard. In some instances, this could result in a change in the timing and/or pattern of revenue recognition. Questio 2 : Do all contracts with a stand - ready element include a single n 7 - [TRG meeting performance obligation that is satisfied over time? November 2015 – Agenda paper no. 48 ] 9 - 3 in section 4.1.1 See response to Question 4 7.1.1 Customer simultaneously receives and consumes benefits as the entity (updated October 2018) performs As the Board explained in the Basis for Conclusions, in many service contracts the entity’s performance creates an asset, momentarily, because that asset is simultaneously receiv ed and consumed by the customer. In these cases, the customer obtains control of the entity’s output as the entity performs. 239 While this Therefore, the performance obligation is satisfied over time. criterion most often applies RG discussed instances to service contracts, the T in which commodity contracts (e.g., electricity, natural gas , heating oil) could be recognis ed over time. These situations could arise if the facts and circumstances of the contract indicate that the customer will simultaneously receive and consume the benefits (e.g., a continuous supply contract to meet 240 immediate demands). Refer to Question 7 - 3 for further information. 239 IFRS 15.BC125. 240 , dated TRG Agenda paper no. 43, Determining When Control of a Commodity Transfers . July 2015 13 A closer look at IFRS 15, the revenue recognition standard Updated October 2018 243

244 There may be con tracts in which it is unclear whether the customer simultaneously receives and consumes the benefit of the entity’s performance IFRS 15 provides the following application over time. To assist entities, guidance: Extract from IFRS 15 B3. For some types of performance obligations, the assessment of whether a customer receives the benefits of an entity’s performance as the entity performs and simultaneously consumes those benefits as they are received will be straightforward. Examples i nclude routine or recurring services (such as a cleaning service) in which the receipt and simultaneous consumption by the customer of the benefits of the entity’s performance can be readily identified. B4. For other types of performance obligations, an en tity may not be able to readily identify whether a customer simultaneously receives and consumes the benefits from the entity’s performance as the entity performs. In those circumstances, a performance obligation is satisfied over time if an entity nes that another entity would not need to substantially re - perform determi the work that the entity has completed to date if that other entity were to fulfil the remaining performance obligation to the customer. In determining whether another entity would not need to substantially re - perform the work the entity has completed to date, an entity shall make both of the following assumptions: (a) d isregard potential contractual restrictions or practical limitations that otherwise would prevent the entity from transferring the remaining performance obligation to another entity; and resume p that another entity fulfilling the remainder of the performance (b) obligation would not have the benefit of any asset that is presently controlled by the entity and that would remain controll ed by the entity if the performance obligation were to transfer to another entity. The IASB added this application guidance because the notion of ‘benefit’ can be subjective. As discussed in the Basis for Conclusions, the Board provided an example of a freight logistics contract. Assume that the entity has agreed to transport goods from Vancouver to New York City. Some stakeholders had suggested that the customer receives no benefit from the entity’s performance ered to, in this case, New York City. However, the Board until the goods are deliv said that the customer benefits as the entity performs. This is because, if the goods were only delivered part of the way (e.g., to Chicago), another entity - perform the entity’s performance to date. would not need to substantially re The Board observed that in these cases, the assessment of whether another entity would need to substantially re - perform the entity’s performance to date is an objective way to assess whether the customer receives benefit from the 241 entity’s performance as it occurs. In assessing whether a customer simultaneously receives and consumes the benefits provided by an entity’s performance, all relevant facts and circumstances need to be considered. This includes considering the inherent characteristics of the good or service, the contract terms and information about how the good or service is transferred or delivered. However, as noted in IFRS 15.B4(a), an entity disregards any contractual or practical restrictions esses this criterion. In the Basis for Conclusions, the IASB explained when it ass that the assessment of whether control of the goods or services has transferred 241 IFRS 15.BC126. Updated October 2018 244 A closer look at IFRS 15, the revenue recognition standard

245 to the customer is performed by making a hypothetical assessment of what another entity would need to do if it were to take over the remaining performance. Therefore, actual practical or contractual restrictions would have no bearing on the assessment of whether the entity had already transferred 242 control of the goods or services provided to date. The standa rd provides the following example that illustrates a customer simultaneously receiving and consuming the benefits as the entity performs in relation to a series of distinct payroll processing services: Extract from IFRS 15 Example 13 — Customer simultane ously receives and consumes the benefits (IFRS 15.IE67 IE 68) - An entity enters into a contract to provide monthly payroll processing services to a customer for one year. The promised payroll processing services are accounted for as a single performance obligation in accordance with paragraph 22(b) of IFRS 15. The performance obligation is satisfied over time in accordance with paragraph 35(a) of IFRS 15 because the customer simultaneously receives and consumes the benefits of the entity’s performance in processing each payroll transaction as and when each transaction is processed. The fact that another entity would not need to re - perform payroll processing services for the service that the entity has provided to date also demonstrates that the customer si multaneously receives and consumes the benefits of the entity’s performance as the entity performs. (The entity disregards any practical limitations on transferring the remaining performance obligation, including setup activities that would need to be unde rtaken by another entity.) The entity recognises revenue over time by measuring its progress towards complete satisfaction of that performance obligation in accordance with paragraphs 39 – 45 and B14 – B19 of IFRS 15. The IASB clarified, in the Basis for Conc lusions, that an entity does not evaluate this criterion (to determine whether a performance obligation is satisfied over time) if the entity’s performance creates an asset that the customer does not consume immediately as the asset is received. Instead, a n entity assesses that s performance obligation using the criteria discussed in ections 7.1.2 and 7.1.3. For some service contracts, the entity’s performance will not satisfy its obligation over time because the customer does not consume the benefit of the entity’s performance until the entity’s performance is complete. The standard provides an example (Example 14, extracted in full in s ection 7.1.3) of an entity providing consulting services that will take the form of a professional opinion upon the complet ion of the services. In this situation, an entity cannot conclude that the services are transferred over time based on this criterion. Instead, the entity must consider the remaining two criteria in IFRS 15.35 (see s ections 7.1.2 and 7.1.3 and Example 14 b elow). 242 IFRS 15.BC127. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 245

246 Frequently asked questions - 3 Question 7 : What factors should an entity consider when evaluating whether a customer simultaneously receives and consumes the benefits of a commodity (e.g., electricity, natural gas or heating oil) as the entity performs? [TRG meeting 13 July 2015 – Agenda paper no. 43] TRG members generally agreed that an entity would consider all known facts and circumstances when evaluating whether a customer simultaneously se may include receives and consumes the benefits of a commodity. The the inherent characteristics of the commodity (e.g., whether the commodity can be stored), contract terms (e.g., a continuous supply contract to meet immediate demands) and information about infrastructure or other delivery mechanisms. As s uch, revenue related to the sale of a commodity may or may not be recognised over time, depending on whether the facts and circumstances of the contract indicate that the customer simultaneously receive s and consume the benefits. This evaluation may requi re the use of significant judgement. Whether a commodity meets this criterion and is transferred over time is important in determining whether the sale of a commodity meet the criteria s to apply the series requirement (see ection 4.2.2 above). This, in t urn, s affects how an entity allocate s variable consideration and apply the requirements for contract modifications and changes in the transaction price. 7.1.2 Customer controls the asset as it is created or enhanced (updated October 2018) The second criterion to determine whether control of a good or service is transferred over time requires entities to evaluate whether the customer controls the asset as it is being created or enhanced. For the purpose of this determination, the definition of ‘control’ is the same as previously discussed (i.e., the ability to direct the use of and obtain substantially all of the remaining benefits from the asset). The IASB explained in the Basis for Conclusions that ch the customer controls any work this criterion addresses situations in whi in progress arising from the entity’s performance. T he Board provided an in which the entity has entered into a construction contract example b uild on to the customer’s land, stating that any work in progress arising from the entity’s 243 is generally controlled by the customer . IFR performance S IC also reiterated the overall intent of the criterion om the Basis for and referred to this example fr 244 , during its Conclusions In addition March 2018 meeting. some construction contr acts may also contain clauses indicating that the customer owns any work in progress as the contracted item is being built. Furthermore, the asset being created or enhanced can be either tangible or intangible. 243 IFRS 15.BC129. 244 IFRIC Update . IASB’s website , March 2018, available on the Updated October 2018 246 A closer look at IFRS 15, the revenue recognition standard

247 How we see it time - The Board observed in the Basis for Conclusions that the second over criterion (related to the customer’s control of the asset as it is being - of - created or enhanced) is consistent with the rationale for the percentage pproach for construction contracts under completion revenue recognition a 245 US GAAP. Both approaches acknowledge that, in effect, the entity legacy has agreed to sell its rights to the asset (i.e., work in progress) as the entity a continuous sale). performs (i.e., 7.1.3 Asset with no alte (updated October rnative use and right to payment 2018) In some cases, it may be unclear whether the asset that an entity creates or enhances is controlled by the customer when considering the first two criteria (discussed in s ections 7.1.1 and 7.1.2 above ) for evaluating whether control transfers over time. Therefore, the Board added a third criterion, which requires revenue to be recognised over time if both of the following two requirements are met: • The entity’s performance does not create an asset with alternative use to the entity. The entity has an enforceable right to payment for performance completed • to date. Each of these concepts is discussed further below. Alternative use The IASB explained in the Basis for Conclusions that it had developed the notion of ‘alternative use’ to prevent over time revenue recognition when the entity’s performance does not transfer control of the goods or services to the customer over time. When the entity’s performance creates an asset with an alternati ve use to the entity (e.g., standard inventory items), the entity can readily direct the asset to another customer. In those cases, the entity (not the customer) controls the asset as it is created because the customer does not have the ability to direct t he use of the asset or restrict the entity from directing that asset to another customer. The standard includes the following requirements for ’alternative use’: Extract from IFRS 15 36. An asset created by an entity’s performance does not have an alternative use to an entity if the entity is either restricted contractually from readily directing the asset for another use during the creation or enhancement ctically from readily directing the asset in its of that asset or limited pra completed state for another use. The assessment of whether an asset has an alternative use to the entity is made at contract inception. After contract inception, an entity shall not update the assessment of the alternative use of an asset unless the parties to the contract approve a contract modification – B8 that substantively changes the performance obligation. Paragraphs B6 provide guidance for assessing whether an asset has an alternative use to an entity . ... 245 IFRS 15.BC130. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 247

248 Extract from IFRS 15 (cont’d) B6. In assessing whether an asset has an alternative use to an entity in accordance with paragraph 36, an entity shall consider the effects of contractual restrictions and practical limitations on the entity’s ability to readily direct that asset for anoth er use, such as selling it to a different customer. The possibility of the contract with the customer being terminated is not a relevant consideration in assessing whether the entity would be able to readily di rect the asset for another use. B7. A contrac tual restriction on an entity’s ability to direct an asset for another use must be substantive for the asset not to have an alternative use to the entity. A contractual restriction is substantive if a customer could enforce its rights to the promised asse t if the entity sought to direct the asset for another use. In contrast, a contractual restriction is not substantive if, for example, an asset is largely interchangeable with other assets that the entity g the contract and could transfer to another customer without breachin without incurring significant costs that otherwise would not have been incurred in relation to that contract. B8. A practical limitation on an entity’s ability to direct an asset for another use exists if an entity would incur significant economic losses to direct the asset for another use. A significant economic loss could arise because the entity either would in cur significant costs to rework the asset or would only be able to sell the asset at a significant loss. For example, an entity may be practically limited from redirecting assets that either have design specifications that are unique to a customer or are located in remote areas. In making the assessment of whether a good or service has alternative use, an entity must consider any substantive contractual restrictions. A contractual enforce its rights to the p romised restriction is substantive if a customer could asset if the entity sought to direct the asset for another use. Contractual restrictions that are not substantive, such as protective rights for the customer, are not considered. The Board explained in the Basis for Conclusions that a protective r ight typically gives an entity the practical ability to physically substitute or redirect the asset without the customer’s knowledge or objection to the change. For example, a contract may specify that an entity cannot transfer a good to another customer b ecause the customer has legal title to the good. Such a contractual term would not be substantive if the entity could physically substitute that good for another and could redirect the original good to another customer for little cost. In that case, the c ontractual restriction would merely be a protective right and would not indicate that control of 246 the asset has transferred to the customer. An entity also need s to consider any practical limitations on directing the asset for another use. In making thi s determination, the Board clarified that an entity considers the characteristics of the asset that ultimately will be transferred to the customer and assesses whether the asset in its completed state could be redirected without a significant cost of rewo rk. The Board provided an example of manufacturing contracts in which the basic design of the asset is the same across all contracts, but substantial customisation is made to the asset. As a result, redirecting the finished asset would require significant rework and the asset would not have an alternative use because the entity 247 would incur significant economic losses to direct the asset for another use. 246 IFRS 15.BC138. 247 IFRS 15.BC138. Updated October 2018 248 A closer look at IFRS 15, the revenue recognition standard

249 Considering the level of customisation of an asset may help entities assess ernative use. The IASB noted in the Basis for whether an asset has an alt Conclusions that, when an entity is creating an asset that is highly customised for a particular customer, it is less likely that the entity could use that asset 248 That is, it is likely t hat for any other purpose. the entity would need to incur o sts to redirect the asset to another customer or sell the significant rework c asset at a significantly reduced price. As a result, the asset would not have an alternative use to the entity and the customer could be regar ded as receiving the benefit of the entity’s performance as the entity performs (i.e., having control of the asset), provided that the entity also has an enforceable right to payment (discussed below). However, the Board clarified that the level of custom isation is a factor to consider, but it should not be a determinative factor. For example, in some real estate contracts, the asset may be standardised (i.e., not highly customised), but it still may not have an alternative use to the entity because of sub stantive contractual restrictions that preclude 249 the entity from readily directing the asset to another customer. The standard provides the following example to illustrate an evaluation of practical limitations on directing an asset for another use: Extra ct from IFRS 15 Example 15 — Asset has no alternative use to the entity (IFRS 15.IE73 - IE76) An entity enters into a contract with a customer, a government agency, to build a specialised satellite. The entity builds satellites for various customers, such as governments and commercial entities. The design and construction substantially, on the basis of each customer's needs of each satellite differ and the type of technology that is incorporated into the satellite. At contract inception, the entity assesses whether its performance obligation to build the satellite is a performance obligation satisf ied over time in accordance with paragraph 35 of IFRS 15. As part of that assessment, the entity considers whether the satellite in its completed state will have an alternative use to the entity. Although the contract does not preclude the entity from dir ecting the completed satellite to another customer, the entity would incur significant costs to rework the design and function of the satellite to direct that asset to another customer. Consequently, the asset has no alternative use to the entity (see pa ragraphs 35(c), 36 and B6 – B8 of IFRS 15) because the customer - specific design of the satellite limits the entity's practical ability to readily direct the satellite to another customer. For the entity's performance obligation to be satisfied over time when building the satellite, paragraph 35(c) of IFRS 15 also requires the entity to have an enforceable right to payment for performance completed to date. This condition is not illustrated in this example. 248 IFRS 15.BC135. 249 IFRS 15.BC137. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 249

250 Requiring an entity to assess contractual restrictions when evaluating this criterion may seem to contradict the requirements in IFRS 15.B4 to ignore contractual and practical restrictions when evaluating whether another entity would need to substantially reperform the work the entity has completed to ection 7.1.1). The Board explained that this difference is appropriate date (see s because each criterion provides a different method for assessing when control 250 transfers and the criteria were designed to apply to different situations. After contract inception, an entity does not update its assessment of whether an asset has an alternative use for any subsequent changes in facts and circumstances, unless the parties approve a contract modification that ively changes the performance obligation. The IASB also decided substant that an entity’s lack of an alternative use for an asset does not, by itself, mean that the customer effectively controls the asset. The entity would also need to orceable right to payment for performance to date, determine that it has an enf 251 as discussed below. Enforceable right to payment for performance completed to date To evaluate whether it has an enforceable right to payment for performance completed to date, required to consider the terms of the contract the entity is and any laws or regulations that relate to it. The standard states that the right to payment for performance completed to date need not be for a fixed amount. entity must be entitled to However, at any time during the contract term, an an amount that at least compensates the entity for performance completed to date (as defined in IFRS 15.B9 , see extract below) , even if the contract is terminated by the customer (or another party) for reasons other than 252 The IASB concluded that the entity’s failure to perform as promised. a customer’s obligation to pay for the entity’s performance is an indicator 253 that the customer has obtained benefit from the entity’s performance. The standard states the following about a n entity’s right to payment for performance completed to date: Extract from IFRS 15 B9. In accordance with paragraph 37, an entity has a right to payment for performance completed to date if the entity would be entitled to an amount that at least compensa tes the entity for its performance completed to date in the event that the customer or another party terminates the contract for reasons other than the entity’s failure to perform as promised. An amount that would compensate an entity for performance comp leted to date would be an amount that approximates the selling price of the goods or services transferred to date (for example, recovery of the costs incurred by an entity in satisfying the performance obligation plus a reasonable profit margin) rather tha n compensation for only the entity’s potential loss of profit if the contract were to be terminated. Compensation for a reasonable profit margin need not equal the profit margin expected if the contract was fulfilled as promised, but an entity should be en titled to compensation for either of the following amounts: a (a) proportion of the expected profit margin in the contract that reasonably reflects the extent of the entity’s performance under the contract before termination by the customer (or another party); or 250 IFRS 15.BC139. 251 IFRS 15.BC141. 252 IFRS 15.37. 253 IFRS 15.BC142. Updated October 2018 250 A closer look at IFRS 15, the revenue recognition standard

251 Extract from IFRS 15 (cont’d) reasonable return on the entity’s cost of capital for similar contracts (or (b) a the entity’s typical operating margin for similar contracts) if the contract - specific margin is higher than the return the entity usually generates from similar contracts. B10. An entity’s right to payment for performance completed to date need not be a present unconditional right to payment. In many cases, an entity will have an unconditional right to payment only at an agreed - upon milestone or upon complete satisfaction o f the performance obligation. In assessing whether it has a right to payment for performance completed to date, an entity shall consider whether it would have an enforceable right to demand or retain payment for performance completed to date if the contra ct were to be terminated before completion for reasons other than the entity’s failure to perform as promised. B11. In some contracts, a customer may have a right to terminate the contract only at specified times during the life of the contract or the cust omer might not have any right to terminate the contract. If a customer acts to terminate a contract without having the right to terminate the contract at that time (including when a customer fails to perform its obligations as promised), the contract (or o ther laws) might entitle the entity to continue to transfer to the customer the goods or services promised in the contract and require the customer to pay the consideration promised in exchange for those goods or services. In those circumstances, an enti ty has a right to payment for performance completed to date because the entity has a right to continue to perform its obligations in accordance with the contract and to require the customer to perform its obligations (which include paying the promised con sideration). B12. In assessing the existence and enforceability of a right to payment for performance completed to date, an entity shall consider the contractual terms as well as any legislation or legal precedent that could supplement or override those c ontractual terms. This would include an assessment of whether: (a) l egislation , administrative practice or legal precedent confers upon the entity a right to payment for performance to date even though that right is not specified in the contract with the custo mer; elevant (b) r legal precedent indicates that similar rights to payment for performance completed to date in similar contracts have no binding legal effect; or (c) a n entity's customary business practices of choosing not to enforce a right to payment has resulted in the right being rendered unenforceable in that legal environment. However, notwithstanding that an entity may choose to waive its right to payment in similar contracts, an entity would continue to have a right to payment to date if, in the cont ract with the customer, its right to payment for performance to date remains enforceable. The IASB described in the Basis for Conclusions how the factors of ‘no alternative use’ and the ‘right to payment’ relate to the assessment of control. Since an enti ty is constructing an asset with no alternative use to the entity, the entity is effectively creating an asset at the direction of the customer. That asset would have little or no value to the entity if the customer were to terminate esult, the entity will seek economic protection from the risk the contract. As a r A closer look at IFRS 15, the revenue recognition standard Updated October 2018 251

252 of customer termination by requiring the customer to pay for the entity’s performance to date in the event of customer termination. The customer’s to date (or, the inability to avoid obligation to pay for the entity’s performance paying for that performance) suggests that the customer has obtained the 254 benefits from the entity’s performance. The enforceable right to payment criterion has two components that an entity must assess: • The amount that the customer would be required to pay And • What it means to have the enforceable right to payment The Board provided additional application guidance on how to evaluate each of these components. that the focus of the Firstly, the Board explained in the Basis for Conclusions analysis should be on the amount to which the entity would be entitled upon 255 This amount is not the amount the entity would settle for in a termination. ity negotiation and it does not need to reflect the full contract margin that the ent would earn if the contract were completed. The Board clarified in IFRS 15.B9 that a 'reasonable profit margin’ would either be a proportion of the entity’s expected profit margin that reasonably reflects the entity’s performance to date or a reasonable return on the entity’s cost of capital. In addition, the standard clarifies, in IFRS 15.B13, that including a payment schedule in a contract does not, in and of itself, indicate that the entity has the right to payment for performance completed to date. This is because, in some cases, the contract may specify that the consideration received from the customer is refundable for reasons other than the entity failing to perform as promised in the contract. The ct the payment schedule and entity must examine information that may contradi may represent the entity’s actual right to payment for performance completed to date. As highlighted in , payments from a customer must Example 16 below approximate the selling price of the goods or services transferred to date to be considered a right to payment for performance to date. A fixed payment schedule may not meet this requirement. Secondly, the IASB added appli cation guidance in IFRS 15.B12 to help an entity assess the existence and enforceability of a right to payment . In making this assessment, entities need to consider any laws, legislation or legal precedent that could supplement or override the contractual terms. Furthermore, the standard indicates that an entity may have an enforceable right to payment even when the customer terminates the contract without having the right to terminate. This would be the case if the contract (or other law) entitles the en tity to continue to transfer the goods or services promised in the contract and require promised for those goods or services (often the customer to pay the consideration 256 referred to as ‘specific performance’). The standard also states that even when an en tity chooses to waive its right to payment in other similar contracts, an entity would continue to have a right to payment for the contract if, in the contract, its right to payment for performance to date remains enforceable. 254 IFRS 15.BC142. 255 IFRS 15.BC144. 256 IFRS 15.BC145. Updated October 2018 252 A closer look at IFRS 15, the revenue recognition standard

253 The standard provides the fol lowing example to illustrate the concepts described s Example 14 depicts an entity providing consulting services that in ection 7.1.3. will take the form of a professional opinion upon the completion of the services. In this example, the entity’s performanc e obligation meets the no alternative use and right to payment criterion of IFRS 15.35(c), as follows : Extract from IFRS 15 Example 14 — Assessing alternative use and right to payment (IFRS 15.IE69 - IE72) An entity enters into a contract with a customer to provide a consulting service that results in the entity providing a professional opinion to the customer. The professional opinion relates to facts and circumstances that are specific to the customer. If the customer were to terminate the consulting contract for reasons other than the entity’s failure to perform as promised, the contract requires the customer to compensate the entity for its costs incurred plus a 15 per cent margin. The 15 per cent margin approximates the profit margin that the entity earns from similar contracts. The entity considers the criterion in paragraph 35(a) of IFRS 15 and the requirements in paragraphs B3 and B4 of IFRS 15 to determine whether the customer simultaneously receives and consumes the benefits of the entity’s performance. If the entity were to be unable to satisfy its obligation and the customer hired another consulting firm to provide the opinion, the other - consulting firm would need to substantially re perform the wo rk that the entity had completed to date, because the other consulting firm would not have the benefit of any work in progress performed by the entity. The nature of the professional opinion is such that the customer will receive the benefits of the entity ’s performance only when the customer receives the professional opinion. Consequently, the entity concludes that the criterion in 35(a) of IFRS 15 is not met. paragraph However, the entity’s performance obligation meets the criterion in paragraph 35(c) of IFRS 15 and is a performance obligation satisfied over time because of both of the following factors: (a) i n accordance with paragraphs 36 and B6 – B8 of IFRS 15, the development of the professional opinion does not create an asset with ntity because the professional opinion relates to alternative use to the e facts and circumstances that are specific to the customer. Therefore, there is a practical limitation on the entity’s ability to readily direct the asset to another customer. (b) i n accordance with paragraphs 3 7 and B9 – B13 of IFRS 15, the entity has an enforceable right to payment for its performance completed to date for its costs plus a reasonable margin, which approximates the profit margin in other contracts. Consequently, the entity recognises revenue over time by measuring the progress towards complete satisfaction of the performance obligation in B19 of IFRS 15. accordance with paragraphs 39 – 45 and B14 – A closer look at IFRS 15, the revenue recognition standard Updated October 2018 253

254 Example 16 illustrates a contract in which the fixed payment schedule is not all times throughout the contract, to the amount expected to correspond, at that would be necessary to compensate the entity for performance completed to date. Accordingly, the entity concludes that it does not have an enforceable right to payment for performance completed to date a s follows: Extract from IFRS 15 Example 16 — Enforceable right to payment for performance completed to date (IFRS 15.IE77 - IE80) An entity enters into a contract with a customer to build an item of equipment. The payment schedule in the contract specifies that the customer must make an advance payment at contract inception of 10 per cent of the contract price, regular payments thro ughout the construction period (amounting to 50 per cent of the contract price) and a final payment of 40 per cent of the contract price after construction is completed and the equipment has passed the prescribed performance tests. The payments are - non refundable unless the entity fails to perform as promised. If the customer terminates the contract, the entity is entitled only to retain any progress payments received from the customer. The entity has no further rights to compensation from the custom er. At contract inception, the entity assesses whether its performance obligation to build the equipment is a performance obligation satisfied over time in accordance with paragraph 35 of IFRS 15. As part of that assessment, the entity considers whether it has an enforceable right to payment for performance completed to date in accordance with paragraphs 35(c), 37 and B9 – B13 of IFRS 15 if the customer were to terminate the contract for reasons other than the entity's failure to ugh the payments made by the customer are perform as promised. Even tho refundable, the cumulative amount of those payments is not expected, at - non all times throughout the contract, to at least correspond to the amount that would be necessary to compensate the entity for performance c ompleted to date. This is because at various times during construction the cumulative amount of consideration paid by the customer might be less than the selling price of the partially completed item of equipment at that time. Consequently, rformance completed to the entity does not have a right to payment for pe date. Because the entity does not have a right to payment for performance completed to date, the entity's performance obligation is not satisfied over IFRS 15. Accordingly, the entity time in accordance with paragraph 35(c) of does not need to assess whether the equipment would have an alternative use to the entity. The entity also concludes that it does not meet the criteria in paragraph 35(a) or (b) of IFRS 15 and thus, the entity accounts for the construction of the equipment as a performance obligation satisfied at a point in time in accordance with paragraph 38 of IFRS 15. Updated October 2018 254 A closer look at IFRS 15, the revenue recognition standard

255 Example 17 contrasts similar situations and illustrates when revenue would ection 7.1) ve rsus at a point in time (see s be recognised over time (see s 7.2). Specifically, this example illustrates the evaluation of the ‘no ection alternative use’ and ‘right to payment for performance to date’ concepts, as follows: Extract from IFRS 15 Example 17 — Assessing whether a performance obligation is satisfied at a point in time or over time (IFRS 15.IE81 - IE90) An entity is developing a multi unit residential complex. A customer enters - into a binding sales contract with the entity for a specif ied unit that is under construction. Each unit has a similar floor plan and is of a similar size, but other attributes of the units are different (for example, the location of the unit within the complex). Case A — Entity does not have an enforceable right to payment for performance completed to date The customer pays a deposit upon entering into the contract and the deposit is refundable only if the entity fails to complete construction of the unit in act price is payable accordance with the contract. The remainder of the contr on completion of the contract when the customer obtains physical possession of the unit. If the customer defaults on the contract before completion of the unit, the entity only has the right to retain the deposit. At contract inceptio n, the entity applies paragraph 35(c) of IFRS 15 to determine whether its promise to construct and transfer the unit to the customer is a performance obligation satisfied over time. The entity determines that it does not have an enforceable right to paym ent for performance completed to date because, until construction of the unit is complete, the entity only has a right to the deposit paid by the customer. Because the entity does not have a right to payment for work completed to date, the entity’s perform ance obligation is not a performance obligation satisfied over time in accordance with paragraph 35(c) of IFRS 15. Instead, the entity accounts for the sale of the unit as a performance obligation satisfied at a point in time in accordance with paragraph 3 8 of IFRS 15. — Entity has an enforceable right to payment for performance Case B completed to date - The customer pays a non refundable deposit upon entering into the contract and will make progress payments during construction of the unit. The contract has s ubstantive terms that preclude the entity from being able to direct the unit to another customer. In addition, the customer does not have the right to terminate the contract unless the entity fails to perform obligations by failing to make as promised. If the customer defaults on its the promised progress payments as and when they are due, the entity would have a right to all of the consideration promised in the contract if it completes the construction of the unit. The courts have previously upheld sim ilar rights that entitle developers to require the customer to perform, obligations under the contract. subject to the entity meeting its A closer look at IFRS 15, the revenue recognition standard Updated October 2018 255

256 Extract from IFRS 15 (cont’d) At contract inception, the entity applies paragraph 35(c) of IFRS 15 to determine whether its promise to construct and transfer the unit to the customer is a performance obligation satisfied over time. The entity determines that the asset (unit) created by the entity’s performance does not have an alternative use to the entity because the contract precludes the entity from transferring the specified unit to another customer. The entity does not consider the possibility of a contract termination in assess ing whether the entity is able to direct the asset to another customer. The entity also has a right to payment for performance completed to date in accordance with paragraphs 37 and B9 B13 of IFRS 15. This is because – if the customer were to default on i ts obligations, the entity would have an enforceable right to all of the consideration promised under the contract if it continues to perform as promised. Therefore, the terms of the contract and the practices in the legal jurisdiction indicate that there is a right to payment for performance completed to date. Consequently, the criteria in paragraph 35(c) of IFRS 15 are met and the entity has a performance obligation that it satisfies over time. To recognise revenue for that performance obligation satisfi ed over time, the entity measures its progress towards complete satisfaction of its performance obligation in accordance with paragraphs 39 – B19 of IFRS 15. 45 and B14 – unit residential complex, the entity may have - In the construction of a multi many contrac ts with individual customers for the construction of individual units within the complex. The entity would account for each contract separately. However, depending on the nature of the construction, the entity’s performance in undertaking the initial const ruction works (ie the foundation and the basic structure), as well as the construction of common areas, may need to be reflected when measuring its progress towards complete satisfaction of its performance obligations in each contract. Entity has an enforceable right to payment for performance Case C — completed to date The same facts as in Case B apply to Case C, except that in the event of a default by the customer, either the entity can require the customer to entity can cancel the contract perform as required under the contract or the in exchange for the asset under construction and an entitlement to a penalty of a proportion of the contract price. Notwithstanding that the entity could cancel the contract (in which case the customer’s obligation to the entity would be limited to transferring control of the partially completed asset to the entity and paying the penalty prescribed), the entity has a right to payment for performance completed to date because the entity could also choose to enforce its s to full payment under the contract. The fact that the entity may right choose to cancel the contract in the event the customer defaults on its obligations would not affect that assessment (see paragraph B11 of 15), provided that the entity’s rights to req uire the customer to IFRS continue to perform as required under the contract (ie pay the promised consideration) are enforceable. Updated October 2018 256 A closer look at IFRS 15, the revenue recognition standard

257 Frequently asked questions 4 : Should an entity consider the completed asset or the work in - Question 7 gr ess when assessing whether its performance creates an asset with no pro IFRS 15.35 (c) ? [FASB TRG meeting 7 November 2016 alternative use under A genda paper no. 56] - FASB TRG members generally agreed that when an entity evaluates whether its performance creates an asset with no alternative use, it should consider whether it could sell the completed asset to another customer without incurring a significant economic loss (i.e., whether it could sell the raw materials or work in pro gr ess to another customer is not relevant). This co nclusion is supported by the Board ’s comment in the Basis for Conclusions “that an entity should consider the characteristics of the asset that will 257 ultimately be transferred to the customer ” . However, as discussed above in section 7.1.3 and in accordance with , if the entity is contractually restricted or has a practical limitation IFRS 15.36 on its ability to direct the asset for another use, the asset would not have an alternative use, regard less of the characteristics of the completed asset. A c ontractual restriction is substantive if a customer could enforce its rights to the promised asset if the entity sought to direct the asset for another use. A practical limitation exists if an entity would incur a significant economic loss to direct the asset for another use. The FASB TRG agenda paper included the following example: Example of no alternative use An entity enters into a contract with a customer to build customised equipment. The custo misation of the equipment occurs when the manufacturing process is approximately 75% complete. That is, for approximately the first 75% of the manufacturing process, the in - process asset could be redirected to fulfil another customer’s equipment order (ass uming no contractual restrictions). However, the equipment cannot be sold in its completed state to another customer without incurring a significant economic loss. The design specifications of the equipment are unique to the customer and the entity woul d only be able to sell the completed equipment at a significant economic loss. The entity would evaluate, at contract inception, whether there is any contractual restriction or practical limitation on its ability to readily direct the asset (in its comple ted state) for another use. Because the entity cannot sell the completed equipment to another customer without incurring a significant economic loss, the entity has a practical limitation on its ability to direct the equipment in its completed state and, therefore, the asset does not have an alternative use. However, before concluding that revenue should be recognised over time, an entity must evaluate whether it has an enforceable right to payment. 257 BC136. IFRS 15. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 257

258 Frequently asked questions (cont’d) - 5 : Question 7 should an entity determine whether it has an enforceable How right to payment under IFRS 15.35 (c)? [FASB TRG meeting 7 November 2016 - A genda paper no. 56] FASB TRG members generally agreed that entities need to evaluate the contractual provisions to determi ne whether the right to payment compensates the entity for performance completed to date. For example, a contract may not explicitly provide an entity with an enforceable right to payment for anything other than finished goods. However, if the termination 60 days) that would provisions in the contract allow for a notice period (e.g., gr ess to the provide sufficient time for an entity to move all work in pro finished goods stage, it is likely that an entity would conclude that the contract provides for an en forceable right to payment for performance completed to date. In addition, an entity should consider any legislation or legal precedent that could supplement or override any contractual terms. The FASB TRG also discussed the linkage amongst right to payme nt, measure of progress and the timing of the customisation of a good. For example, the FASB TRG noted an entity may not always have an enforceable right to payment at contract inception, such as when an entity is producing standard goods (i.e., inventory ) that may be customised for a customer towards the end of the production process. FASB TRG members generally agreed that an entity would need to consider whether it has an enforceable right to payment related to its performance completed to date. If the e ntity’s performance obligation is to customise its standard goods for a customer, FASB TRG members generally agreed that an entity would evaluate whether it has an enforceable right to payment at the point that the entity begins to satisfy the performance obligation to customise the goods for the customer. That is, because the right to payment is for performance completed to date, an entity’s performance should coincide with how it defines the nature of its performance obligation and its measure of progre ss toward satisfaction of that performance obligation. Question 7 - : In order to have an enforceable right to payment for 6 performance completed to date, does an entity need to have a present unconditional right to payment? No. In the Basis for Conclusions, the IASB clarified that the contractual payment terms in a contract may not always align with an entity’s enforceable rights to payment for performance completed to date. As a result, an entity ht to payment. Instead, does not need to have a present unconditional rig it must have an enforceable right to demand and/or retain payment for performance completed to date upon customer termination without cause. To illustrate this point, the Board included an example of a consulting contract that req uires an entity to provide a report at the end of the project. In return, the entity earns a fixed amount, which is due and payable to the entity when it delivers the report. Assume that the entity is performing under the contract and that the contract (o r the law) requires the customer to compensate the entity for its performance completed to date. In that situation, the entity would have an enforceable right to payment for performance completed to date, even though an unconditional right to the fixed amo unt only exists at the time the report is provided to the customer. This is because the entity has 258 a right to demand and retain payment for performance completed to date. 258 IFRS 15.BC145. Updated October 2018 258 A closer look at IFRS 15, the revenue recognition standard

259 Frequently asked questions (cont’d) 7 - : Does an entity have a right to Question 7 payment for performance refundable upfront payment - completed to date if the entity receives a non that represents the full transaction price? Yes. The Board explained in the Basis for Conclusions that such a payment would represent an entity’s right to pay ment for performance completed to date provided that the entity’s right to retain and not refund the payment is enforceable upon termination by the customer. This is because a full upfront payment would at least compensate an entity for the work completed to date 259 throughout the contract. 8: - Can an entity conclude it has an enforceable right to payment Question 7 contract is priced at a loss? for performance completed to date when a Yes h owever, the specific facts and circumstances of the contract must be , considered. As discussed above, the standard states that, if a contract is terminated for reasons other than the entity’s failure to perform as promised, the entity must be entitled to an amount that at least compensates it for its performance to date. Fu rthermore, IFRS 15.B9 states that “A n amount that would compensate an entity for performance completed to date would be amount that approximates the selling price of the goods or services an transferred to date by an entity (for example, recovery of the costs incurred . in satisfying the performance obligation plus a reasonable profit margin) ” Accordingly, stakeholders had asked whether an entity could have an enforceable right to payment for performance completed to date if the contract was priced at a lo ss. We believe that the example in IFRS 15.B9 of cost recovery plus a reasonable profit margin does not preclude an entity from having an enforceable right to payment even if the contract is priced at a loss. Rather, we believe an entity hether an enforceable right to receive an amount it has should evaluate w for performance that approximates the selling price of the goods or services in the event the customer terminates completed to date the contract . Consider the following example from the American Institute of Certified Public 260 Accountants (AICPA) Audit and Accounting Guide, : Revenue Recognition Example of d etermination of enforceable right to payment for a c ontract priced at a loss hly customised system. The Customer X requests bids for the design of a hig customer expects to award subsequent contracts for systems over the next 10 years to the entity that wins the design contract. Contractor A is aware of the competition and knows that in order to win the design contract it must bi d the contract at a loss. That is, Contractor A is willing to bid the design contract at a loss due to the significant value in future expected orders. 259 IFRS 15.BC146. 260 , Revenue Recognition , Chapter 3, Aerospace and Defense Entities See AICPA guide, - . 3.5.18 3.5.23 paragraph s A closer look at IFRS 15, the revenue recognition standard Updated October 2018 259

260 Frequently asked questions (cont’d) Example of d etermination of enforceable right to payment for a (cont’d) contract priced at a loss Contractor A wins the contract with a value of CU100 and estimated costs to complete of CU130. Contractor A has determined that the contract contains a single performance obligation and that its performance does - cancellable not create an asset with an alternative use. The contract is non , however, the contract terms stipulate that if ustomer terminates the the c contract, Contractor A would be entitled to payment for work completed t o date. The payment amount would be equal to a proportional amount of the price of the contract based upon the performance of work done to date. For example, if at the termination date Contractor A was 50% complete (i.e . , incurred CU65 of costs), it would be entitled to a CU50 payment from Customer X (i.e., 50% of CU100 contract value). In this example, we believe Contractor A has an enforceable right to in accordance payment for performance completed to date . This is to an with paragraph IFRS 15.35 (c ) because Contractor A is entitled amount that approximates the selling price of the good or service for performance completed to date in the event the customer terminates . the contract section 9.2 regarding accounting for anticipated losses on Refer to contracts. - Can an entity Question 7 have an enforceable right to payment for 9: performance completed to date if it is not entitled to a reasonable profit margin on standard inventory materials that were purchased but not yet used in completing the perfor mance obligation? Yes. Consider an example in which an entity agrees to construct a specialised asset for a customer that has no alternative use to the entity. The construction of this asset requires the use of standard inventory materials that could be us ed interchangeably on other projects of the entity until they are integrated into the production of the customer’s asset. The contract with the customer entitles the entity to reimbursement of costs incurred plus a reasonable profit margi n if the contract is terminated. However, the contract specifically excludes reimbursement of standard inventory purchases before they are integrated into the customer’s asset. As previously discussed, the standard states that at any time during the contract, an entity mus t be , entitled to an amount that compensates the entity for performance completed to date (as defined in IFRS 15.B9) if the contract is terminated for reasons other than the entity’s failure to perform. However, in this example, the standard inventory mate rials have not yet been used in fulfilling the performance obligation so the entity does not need to have an enforceable right to payment in relation to these materials. The e ntity could also materials for use in other contracts with customer s. repurpose the The entity will still need to evaluate whether it has an enforceable right to payment for performance completed to date once the standard inventory ing the performance obligation. materials are used in fulfill Updated October 2018 260 A closer look at IFRS 15, the revenue recognition standard

261 Frequently asked questions (cont’d) 10 What should an entity consider when assessing the over - time Question 7 : - criteria October for the sale of 2018) a real estate unit? (updated received three request s regarding the assessment of the over - The IFRS IC contract s for the sale of a real estate unit. At time criteria in relation to S March 201 8 meeting, the IFR IC concluded that the principles and its requirements in IFRS 15 provide an adequate basis for an entity to determine or at a point in time , inclu ding , whether to recognise revenue over time r performance completed to whether it has an enforceable right to payment fo for a contract for the sale of a real estate unit. Consequently, the IFR S IC date 261 e s e matter s to its agenda. decided not to add th s After e s e request considering th , the IFRS I C decided that the agenda decisions should discuss the requirements of IFRS 15, as well as how the requirements apply to the fact patterns within the requests. The agenda decisions included the following reminders: An entity accounts for contracts within the scope of IFRS 15 only when • all the criteria in IFRS 15.9 are met (which includes the collectability criterion). - time criteria, an entity is required to apply • Before considering the over 30 to identif y whether each promise to transfer a good or – IFRS 15.22 obligation (see section 4.2 service to the customer is a performance for further discussion). - time criteria in IFRS 15.35 at contract • An entity assesses the over inception. IFRS 15.35 specifies that an entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, if any of the three criteria is met. If an entity does not satisfy a performance obligation over time, it satisfies the performance obligation at a point in time. also The agenda decisions noted the following in relation to the over - time criteria. Criterion (a) According to IFRS 15.35(a), an entity recognises revenue over time if the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs. This criterion is not applicable in a contract for the sale o f a real estate unit that the entity constructs because the real estate unit created by the entity’s performance is not consumed immediately. Criterion (b) IFRS 15.35(b) specifies that an entity recognises revenue over time if the customer controls the as set that an entity’s performance creates or enhances as the asset is created or enhanced. Control refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. The Board included this criterion to “addr ess situations in which an entity’s performance creates or enhances an asset that a customer clearly 262 controls as the asset is created or enhanced”. Therefore, all relevant 261 IASB’s website IFRIC Update , March 2018, available on the . 262 IFRS 15.BC129. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 261

262 Frequently asked questions (cont’d) need to be considered by an entity when facts and circumstances assessing whether there is evidence that the customer controls the asset that is clearly constructed real estate unit) as it is being created or enhanced (e.g., the part - rcumstances is determinative. created or enhanced. None of the facts and ci IFRS IC observed that “in The real estate that a contract for the sale of the entity constructs, the asset created is the real estate itself. It is not, for in the future. The right to sell or example, the right to obtain the real estate a right to obtain real estate in the future pledge is not evidence of control of 263 the real estate itself”. That is, it is important to apply the requirements for control to the asset that the entity’s performance creates or enhances. Criterion (c) not The Board developed this third criterion because, in some cases, it may be clear whether the asset that is created or enhanced is controlled by the IFRS 15.35(c) requires customer. to determine whether: (a) the an entity as set created by an entity’s performance does not have an alternative use to the entity; and (b) the entity has an enforceable right to payment for performance completed to date. However, the underlying objective of this criterion is still to determine whet her the entity is transferring control of goods or services to the customer as it is creating the asset for that customer. The agenda decisions r eiterate that: The • asset being created does not have an alternative use to the entity if the entity is restricted contractually from readily directing the asset for another use is limited practically from during the asset’s creation or if it 264 readily directing the asset in the completed state for another use. The entity has an enforceable right to payment if it is entitled to an • amount that at least compensates it for performance completed to date were the contract to be terminated by the customer for reasons other 265 than the entity’s failure to perform as promised. The e ntity must be entitled to this amount at all times throughout the duration of the and this amount should at least approximate the selling price of contract That is, it is not meant to refer the goods or services transferred to date. ly the entity’s potential loss of profit were the to compensation for on contract to be terminated. The IFRS IC observed that ”it is the payment the entity is entitled to receive under the contract with the customer relating to performance under that contract that is relevant in determining whether the entity has an enforceable right to payment 266 . for performance completed to date” In deter mining whether it has an enforceable right to payment, an entity consider s the contractual terms as well as any legislation or legal precedent that could supplement or override those contractual terms. While an entity does not need to undertake an exhaustive search for ence of relevant evidence, it is not appropriate for an entity to ignore evid available to it or to anticipate evidence that may legal precedent that is 263 IFRIC Update , March 2018, available on the IASB’s website . 264 , March 2018, available on the IFRS 15.36; IFRIC Update IASB’s web site . 265 IFRS 15.37; IFRIC Update , March 2018, available on the IASB’s website . 266 . IASB’s website , March 2018, available on the IFRIC Update Updated October 2018 262 A closer look at IFRS 15, the revenue recognition standard

263 Frequently asked questions (cont’d) available in the future. IFRS IC also observed that “the become The ... assessment is focused on the existence of the right and its enforceability. The likelihood that the entity would exercise the right is not relevant to this assessment. Similarly, if a customer has the right to terminate the contract, the likelihood that the customer would 267 terminate the contract is not relevant to this assessment”. 7.1.4 Measuring progress When an entity has determined that a performance obligation is satisfied over time, the standard requires the entity to select a single revenue recognitio n method for the relevant performance obligation that faithfully depicts the entity’s performance in transferring control of the goods or services. An entity should apply the method selected consistently to similar performance i gations. In addition, at obl the end of each reporting period, an entity is required to remeasure its progress toward completion of the performance obligation. The standard provides the following requirements to meet this objective: Extract from IFRS 15 Methods for measuring progress 41. Appropriate methods of measuring progress include output methods and input methods. Paragraphs B14 – B19 provide guidance for using output methods and input methods to measure an entity’s progress towards complete satisfaction of a performance obligatio n. In determining the appropriate method for measuring progress, an entity shall consider the nature of the good or service that the entity promised to transfer to the customer. 42. When applying a method for measuring progress, an entity shall exclude from the measure of progress any goods or services for which the entity does not transfer control to a customer. Conversely, an entity shall include in the measure of progress any goods or services for which the entity does transfer control to a customer when satisfying that performance obligation. 43. As circumstances change over time, an entity shall update its measure of progress to reflect any changes in the outcome of the perfo rmance obligation. Such changes to an entity’s measure of progress shall be accounted for as a change in accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors . While the standard requires an entity to update its estimates related to the measure of progress selected, it does not permit a change in method. A performance obligation is accounted for using the method the entity selects (i.e., either the specific inp ut or output method it has chosen) from inception until the performance obligation has been fully satisfied. It would not be appropriate for an entity to start recognising revenue based on an input measure and later switch to an output measure (or to switc h from one input method to a different input method). Furthermore, the standard requires that the selected method be applied to similar contracts in similar circumstances. It also requires that a single method of measuring progress be used for each perfor mance obligation. The Board noted that applying more than one method 267 IFRIC Update . IASB’s website , March 2018, available on the A closer look at IFRS 15, the revenue recognition standard Updated October 2018 263

264 to measure performance would effectively override the guidance on identifying 268 performance obligations. If an entity does not have a reasonable basis to measure its progress, revenue cann reasonably measured. However, if ot be recognised until progress can be n entity can determine that a loss will not be incurred, the standard requires a up to the amount of the costs incurred. T he the entity to recognise revenue IASB explained that an entit y would need to stop using this method once it is able to reasonably measure its progress towards satisfaction of the 269 Finally, stakeholders had asked whether an entity’s performance obligation. inability to measure progress would mean that costs incurred would also be deferred. The Board clarified that costs cannot be deferred in these situations, unless they meet the criteria for capitalisation under IFRS 15.95 (see 270 s ection 9.3.2). The standard provides two methods for recognising revenue on contracts involving the transfer of goods or services over time: input methods and output methods. The standard contains the following application guidance on these methods: Extract from IFRS 15 Output methods B15. Output methods recognise revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract. as surveys of performance completed Output methods include methods such to date, appraisals of results achieved, milestones reached, time elapsed and units produced or units delivered. When an entity evaluates whether to apply der whether an output method to measure its progress, the entity shall consi the output selected would faithfully depict the entity’s performance towards complete satisfaction of the performance obligation. An output method would not provide a faithful depiction of the entity’s performance if the fail to measure some of the goods or services for output selected would which control has transferred to the customer. For example, output methods based on units produced or units delivered would not faithfully depict an entity’s performance in satisfying a performance obligat ion if, at the end of the reporting period, the entity’s performance has produced work in progress or finished goods controlled by the customer that are not included in the measurement of the outp ut. B16. As a practical expedient, if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date (for example, a service contract in which an entity bills a fixed amount for each hour of service provid ed), the entity may recognise revenue in the amount to which entity has a right to invoice. the B17. The disadvantages of output methods are that the outputs used to measure progress may not be directly observable and the information required to apply them may not be available to an entity without undue cost. Therefore, an input method may be necessary. 268 IFRS 15.BC161. 269 IFRS 15.BC180. 270 IFRS 15.BC179. Updated October 2018 264 A closer look at IFRS 15, the revenue recognition standard

265 Extract from IFRS 15 (cont’d) Input methods B18. Input methods recognise revenue on the basis of the entity’s efforts or inputs to the satisfaction of a performance obligation (for example, resources consumed, labour hours expended, costs incurred, time elapsed or machine hours used) relative to the total expected inputs to the satisfaction of that performance obligation. If the entity’s efforts or inputs are expended evenly throughout the performance period, it may be appropriate for the entity to line basis. - recognise revenue on a straight that faithfully depicts In determining the best method for measuring progress an entity’s performance , an entity needs to consider both the nature of the In other promised goods or services and the nature of the entity’s performance. words, an entity’s selection of a method to measure its performance needs to to the customer and what the entity be consistent with the nature of its promise has agreed to transfer to the customer. To illustrate this concept, the Basis 271 for Conclusions cites, as an example, a contract for health club services. Regardless of when, or how frequently, the customer uses the heal th club, the entity’s obligation to stand ready for the contractual period does not change. Furthermore, the customer is required to pay the fee regardless of whether the customer uses the health club. As a result, the entity would need re of progress based on its service of standing ready to make to select a measu Example 18 in t the health club available. ) he standard (see section 7.1.4.C illustrates how a health club might select this measure of progress. 7.1.4.A Output methods While there is no preferab le measure of progress, the IASB stated in the Basis for Conclusions that, conceptually, an output measure is the most faithful depiction of an entity’s performance. This is because it directly measures 272 or services transferred to th e customer. the value of the goods However, the Board discussed two output methods that may not be appropriate in many : units of instances if the entity’s performance obligation is satisfied over time 273 delivery and units of production. - Units - delivery or units - of - production methods may not result in the best of depiction of an entity’s performance over time if there is material work in pro gr ess at the end of the reporting period. In these cases, the IASB observed a units - of - that using - of - production method would distort the delivery or units entity’s performance because it would not recognise revenue for the customer - controlled assets that are created before delivery or before construction is complete. This is because, when an entity determines control transfers to the customer ov er time, it has concluded that the customer controls any resulting asset as it is created. Therefore, the entity must recognise revenue related to those goods or services for which control has transferred. The IASB also stated, of in the Basis for Conclusions of - delivery or units - - - production , that a units method may not be appropriate if the contract provides both design and production services because each item produced “may not transfer an equal 274 That is, it is likely that amount of value to the customer”. the items produced earlier have a higher value than those that are produced later. 271 IFRS 15.BC164. 272 IFRS 15.BC160. 273 IFRS 15.BC165. 274 IFRS 15.BC166. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 265

266 It is important to note that ‘value to the customer’ in IFRS 15.B15 refers to an objective method of measuring the entity’s performance in the contract. This ded to be assessed by reference to the market prices, stand alone is not inten - selling prices or the value a customer perceives to be embodied in the goods or 275 services. The TRG agenda paper noted that this concept of value is different ity uses to determine whether it can use from the concept of value an ent the ‘right to invoice’ practical expedient, as discussed below. When an entity determines whether items individually transfer an equal amount of value to the customer (i.e., when applying IFRS 15.B15), the evaluati on related to how much, or what proportion, of the goods or services (i.e., quantities) have been delivered (but not the price). For example, for purposes of applying IFRS 15.B15, an entity might consider the amount of goods or services transferred to date in proportion to the total expected goods or services to be transferred when measuring progress. However, if this measure of progress results in material work in progress at the end of the reporting period, it would not be appropriate, as 276 See the discussion below regarding the evaluation of ‘value discussed above. to the customer’ in the context of evaluating the ‘right to invoice’ practical expedient in IFRS 15.B16. Practical expedient for measuring progress towards satisfaction of a performance obligati on The IASB provided a practical expedient in IFRS 15.B16 for an entity that is using an output method to measure progress towards completion of a performance obligation that is satisfied over time. The practical expedient only applies if an entity can dem onstrate that the invoiced amount corresponds directly with the value to the customer of the entity’s performance completed to date. In that situation, the practical expedient allows an entity to recognise revenue in the amount for which it has the right t o invoice (i.e., the ‘right to invoice’ practical expedient). An entity may be able to use this practical expedient for a service contract in which an entity bills a fixed amount for each hour of service provided. is intended as an expedient to some A TRG agenda paper noted that IFRS 15.B16 aspects of Step 3, Step 4 and Step 5 in the standard. Because this practical expedient allows an entity to recognise revenue on the basis of invoicing, revenue is recognised by multiplying the price (assigned to the goo ds or services delivered) by the measure of progress (i.e., the quantities or units transferred). Therefore, an entity effectively bypasses the steps in the model for determining the transaction price, allocating that transaction price to the performance o bligations and determining when to recognise revenue. However, it does not permit an entity to bypass the requirements for identifying the performance obligations in the contract and evaluating whether the performance obligation 277 ich is a requirement to use this expedient. are satisfied over time, wh To apply the practical expedient, an entity must also be able to assert that the right to consideration from a customer corresponds directly with the value to the customer of the entity’s performance to date. W hen determining whether the amount that has been invoiced to the customer corresponds directly with the value to the customer of an entity’s performance completed to date, the t entity could evaluate the amount that has been invoiced in comparison to marke prices, stand alone selling prices or another reasonable measure of value to - in the customer. See Question 7 1 5 - s ection 7.1.4.C for the TRG discussion on evaluating value to the customer in contracts with changing rates. 275 IFRS 15.BC163. 276 TRG Agenda paper no. 40, Practical Expedient for Measuring Progress toward Complete , dated 13 July 2015. Obligation Satisfaction of a Performance 277 Practical Expedient for Measuring Progress toward Complete TRG Agenda paper no. 40, , dated 13 July 2015. Satisfaction of a Performance Obligation Updated October 2018 266 A closer look at IFRS 15, the revenue recognition standard

267 Furthermore, TRG members also no ted in their discussion of the TRG agenda paper that an entity would have to evaluate all significant upfront payments or retrospective adjustments (e.g., accumulating rebates) in order to determine whether the amount the entity has a right to invoice for each good or service corresponds directly to the value to the customer of the entity’s performance completed to date. That is, if an upfront payment or retrospective adjustment shifts payment for value to the customer to the front or back - end of a contract, it may be difficult for an entity to conclude that the amount invoiced corresponds directly with the value provided to the customer for goods or 278 services. The TRG agenda paper also stated that the presence of an agreed - upon customer payment sche dule does not mean that the amount an entity has the right to invoice corresponds directly with the value to the customer of the entity’s performance completed to date. In addition, the TRG agenda paper stated that the existence of specified contract min imums (or volume discounts) would not always preclude the application of the practical expedient, provided that these clauses are deemed non - substantive (e.g., the entity expects to 279 receive amounts in excess of the specified minimums). 7.1.4.B Input metho ds Input methods recognise revenue based on an entity’s efforts or inputs towards satisfying a performance obligation relative to the total expected efforts or inputs to satisfy the performance obligation. Examples of input methods d include costs incurred, time elapsed, resources mentioned in the standar consumed or labour hours expended. An entity is required to select a single measure of progress for each performance obligation that depicts the entity’s performance in transferring control of the goods or services promised to a customer. If an entity’s efforts or inputs are used evenly throughout the entity’s performance period, a time - based measure that results in a straight line recognition of revenue may be appropriate. However, there may be a disconne ct between an entity’s inputs (e.g., cost of non - distinct goods included in a single performance obligation satisfied over time) and the depiction of an entity’s performance to date. The standard includes specific application guidance on adjustments to th e measure of progress that may be necessary in those situations. See below for additional discussion. Regardless of which method an entity selects, it excludes from its measure of progress any goods or services for which control has not transferred to t he customer. 278 TRG Agenda paper no. 40, Practical Expedient for Measuring Progress towa rd Complete Satisfaction of a Performance Obligation , dated 13 July 2015. 279 Summary of Issues Discussed and Next – TRG Agenda paper no. 44, July 2015 Meeting Steps, dated 9 November 2015. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 267

268 Adjustments to the measure of progress based on an input method If an entity applies an input method that uses costs incurred to measure its progress towards completion (e.g., cost to cost), the cost incurred may not always be proportionate to the entity’s progress in satisfying the performance obligation. To address this shortcoming of input methods, the standard provides the following guidance: Extract from IFRS 15 B19. A shortcoming of input methods is that there may not be a direct nship between an entity’s inputs and the transfer of control of goods relatio or services to a customer. Therefore, an entity shall exclude from an input method the effects of any inputs that, in accordance with the objective of measuring progress in paragraph 39 , do not depict the entity’s performance in transferring control of goods or services to the customer. For instance, - based input method, an adjustment to the measure of when using a cost progress may be required in the following circumstances: (a) When a cost incurred does not contribute to an entity’s progress in satisfying the performance obligation. For example, an entity would not recognise revenue on the basis of costs incurred that are attributable to significant inefficiencies in the entity’ s performance that were not reflected in the price of the contract (for example, the costs of unexpected amounts of wasted materials, labour or other resources that were incurred to satisfy the performance obligation). (b) When a cost incurred is not proportionate to the entity’s progress in satisfying the performance obligation. In those circumstances, the best depiction of the entity’s performance may be to adjust the input method to recognise revenue only to the extent of that cost incurred. For exa mple, a faithful depiction of an entity’s performance might be to recognise revenue at an amount equal to the cost of a good used to satisfy a performance obligation if the entity expects at contract inception that all of the following conditions would be met: he good is not distinct; t (i) (ii) he customer is expected to obtain control of the good significantly t before receiving services related to the good; t he cost of the transferred good is significant relative to the total (iii) expected costs to completely satisfy th e performance obligation; and (iv) t he entity procures the good from a third party and is not significantly involved in designing and manufacturing the good (but the entity is acting as a principal in accordance with paragraphs B34 – B38). - distinct goods In a combined performance obligation comprised of non or the goods before some of services, the customer may obtain control of the entity provides the services related to those goods. This could be the case when goods are delivered to a customer site, but the entity has not yet integrated the goods into the overall project (e.g., the materials are . The Board concluded that, if an entity were using a percentage ‘uninstalled’) - of - completion method based o n costs incurred to measure its progress (i.e., the measure of progress may be inappropriately affected by cost - to - cost) , the delivery of these goods and that a pure application of such a measure of 280 progress would result in overstated revenue. 280 IFRS 15.BC171. Updated October 2018 268 A closer look at IFRS 15, the revenue recognition standard

269 IFRS 15.B1 9 indicates that, in such circumstances (e.g., when control of the individual goods has transferred to the customer, but the integration service has not yet occurred), the best depiction of the entity’s performance may be to recognise revenue at an amount equal to the cost of the goods used to satisfy the performance obligation (i.e., a zero margin). This is because the costs incurred are not proportionate to an entity’s progress in satisfying the performance obligation. It is also important to note that d etermining when control of the individual goods (that are part of a performance obligation) s judgement. have transferred to the customer require - to - cost measure of progress The Board noted that the adjustment to the cost ally intended to apply to a subset of for uninstalled materials is gener type goods that have a significant cost relative to the contract - construction and for which the entity is effectively providing a simple procurement service 281 By applying the adjustment to recognise r to the customer. evenue at an amount equal to the cost of uninstalled materials, an entity is recognising a margin similar to the one the entity would have recognised if the customer had supplied the materials. The IASB clarified that the outcome of recognising no margin for uninstalled materials is necessary to adjust the cost - to - cost 282 calculation to faithfully depict an entity’s performance. In addition, situations may arise in which not all of the costs incurred contribute to the entity’s progress in completing the per formance obligation. IFRS 15.B19(a) requires that, under an input method, an entity exclude these types of costs (e.g., costs related to significant inefficiencies, wasted materials, required rework) from the measure of progress, unless such costs were ref lected in the price of the contract. from legacy What’s chang ed IFRS? The requirements for uninstalled materials may be a significant change from previous ed a requirement that when practice for some entities. IAS 11 contain s determined by reference to the contract costs wa the stage of completion ed work performed were incurred to date, only those contract costs that reflect 283 Hence, costs related to future activities, such as costs of materials included. id not have a high specificity to the conta ct) delivered to a contract site (that d or set aside for use in a contract, but not yet installed, would not form part of the assessment of costs incurred to date. When installed, these would be included in the costs incurred to date. Under IFRS 15, any margin r elated to the uninstalled materials would be shifted to the other goods or services and or recognised as the costs for those goods services are incurred. IFRS 15 does not dictate which approach an entity should use in these situations. However, it is clea r that an entity cannot use an input method based on costs incurred to measure progress when costs are disproportionate to the entity’s progress throughout the life of the contract. Not using a percentage used to measure the stage of completion method (in which costs incurred are of completion) in these situations may represent a significant change for some entities. 281 IFRS 15.BC172. 282 IFRS 15.BC174. 283 IAS 11.31. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 269

270 The standard includes the following example, illustrating how uninstalled materials are considered in measuring progress towards complete satisfaction of a performance obligation: Extract from IFRS 15 Example 19 — Uninstalled materials (IFRS 15.IE95 - IE100) - In November 20X2, an entity contracts with a customer to refurbish a 3 storey building and install new elevators for total consideration of CU5 million. The promised refurbishment service, including the installation bligation satisfied over time. Total of elevators, is a single performance o expected costs are CU4 million, including CU1.5 million for the elevators. The entity determines that it acts as a principal in accordance with paragraphs B34 – B38 of IFRS 15, because it obtains control of the elevators before they are transferred to the customer. A summary of the transaction price and expected costs is as follows: CU Transaction price 5,000,000 Expected costs Elevators 1,500,000 2,500,000 Other costs Total expected costs 4,000,000 The entity uses an input method based on costs incurred to measure its progress towards complete satisfaction of the performance obligation. The entity assesses whether the costs incurred to procure the elevators are proportionate to the entity’s progres s in satisfying the performance obligation, in accordance with paragraph B19 of IFRS 15. The customer obtains control of the elevators when they are delivered to the site in December 20X2, although the elevators will not be installed until June 20X3. The c osts to procure the elevators (CU1.5 million) are significant relative to the total expected costs to completely satisfy the performance obligation (CU4 million). The entity is not involved in designing or manufacturing the elevators. The entity concludes that including the costs to procure the elevators in the measure of progress would overstate the extent of the entity’s performance. Consequently, in accordance with paragraph B19 of IFRS 15, the entity adjusts its measure of progress to exclude the costs to procure the elevators from the measure of costs incurred and from the transaction price. The entity recognises revenue for the transfer of the elevators in an amount equal to the costs to procure the elevators (ie at a zero margin). As of 31 December 20 X2 the entity observes that: (a) o ther costs incurred (excluding elevators) are CU500,000; and (b) erformance p is 20 per cent complete (ie CU500,000 ÷ CU2,500,000). Consequently, at 31 December 20X2, the entity recognises the following: CU (a) 2,200,000 Revenue (b) 2,000,000 Cost of goods sold Profit 200,000 (a) Revenue recognised is calculated as (20 per cent × CU3,500,000) + CU1,500,000. CU1,500,000 costs of elevators.) (CU3,500,000 is CU5,000,000 transaction price – (b) CU500,000 of costs incurred + CU1,500,000 costs of elevators. Cost of goods sold is Updated October 2018 270 A closer look at IFRS 15, the revenue recognition standard

271 7.1.4.C Examples possible consider ations when The following example illustrates some determining an appropriate measure of progress: - 1 — Choosing the measure of progress Illustration 7 - building entity enters into a contract to build 15 vessels for a A ship customer over a three - year period. The contract includes both design and production services. The entity has not built a vessel of this type in the past. In addition, the entity expe cts that the first vessels may take longer to produce than the last vessels because, as the entity gains experience building the vessels, it expects to be able to construct the vessels more efficiently. Assume that the entity has determined that the design and production services represent a single performance obligation. In this situation, it is likely that the entity would not choose a ’units - of - delivery’ method as a measure of progress because that method would not accurately capture rmance. That is, such a method would not reflect the the level of perfo entity’s efforts during the design phase of the contract because no revenue would be recognised until a vessel was shipped. In such situations, an re appropriate, entity would likely determine that an input method is mo such as a percentage of completion method based on costs incurred. The standard also includes the following example on selecting an appropriate measure of progress towards satisfaction of a performance obligation: Extract from IFRS 15 — Measuring progress when making goods or services available Example 18 (IFRS 15.IE92 - IE94) An entity, an owner and manager of health clubs, enters into a contract with a customer for one year of access to any of its health clubs. The customer has unlimite d use of the health clubs and promises to pay CU100 per month. The entity determines that its promise to the customer is to provide a service of making the health clubs available for the customer to use as and when extent to which the customer uses the customer wishes. This is because the the health clubs does not affect the amount of the remaining goods and services to which the customer is entitled. The entity concludes that the customer simultaneously receives and consumes the benefits of the performance as it performs by making the health clubs available. entity's Consequently, the entity's performance obligation is satisfied over time in accordance with paragraph 35(a) of IFRS 15. The entity also determines that the customer benefits from the entity' s service of making the health clubs available evenly throughout the year. (That is, the customer benefits from having the health clubs available, regardless of whether the customer uses it or not.) Consequently, the entity concludes of progress towards complete satisfaction of the that the best measure performance obligation over time is a time based measure and it recognises - line basis throughout the year at CU100 per month. - revenue on a straight A closer look at IFRS 15, the revenue recognition standard Updated October 2018 271

272 Frequently asked questions - : How would an entity measure progress towards satisfaction Question 7 11 of a stand - ready obligation that is satisfied over time? [TRG meeting January 2015 – Agenda paper no. 16] 26 TRG members generally agreed that an entity should not default to a - model. However, they also generally agreed straight line revenue attribution that if an entity expects the customer to receive and consume the benefits of its promise throughout the contract period, a time based measure of - progress (e.g., straight - line) would be appropriate. The TRG agend a paper noted that this is generally the case for unspecified upgrade rights, help - desk support contracts and cable or satellite television contracts. TRG members generally agreed that rateable recognition may not be appropriate if the ead evenly over the contract period (e.g., an annual benefits are not spr snow removal contract that provides most benefits in winter). - 12 Question 7 : Can multiple measures of progress be used to depict an entity’s performance in transferring a performance obligation comprised of two or more goods and/or services that is satisfied over time (i.e., a 284 combined performance obligation)? [TRG meeting 13 J uly 2015 – Agenda paper no. 41] TRG members agreed that when an entity has determined that a combined performance obligation is satisfied over time, the entity has to select a single measure of progress that faithfully depicts the entity’s performance in t ransferring the goods or services. For example, using different measures of progress for different non - distinct goods or services in the combined performance obligation would be inappropriate because doing so ignores ntified under the standard (i.e., the the unit of account that has been ide single combined performance obligation). Furthermore, it would also be inappropriate because the entity would recognise revenue in a way that 285 overrides the separation and allocation requirements in the standard. he T RG agenda paper noted that a single method of measuring progress T should not be broadly interpreted to mean an entity may apply multiple measures of progress as long as all measures used are either output or at there previously input measures. TRG members also acknowledged th was diversity in practice and selecting a single measure of progress may represent a change for entities that use d a multiple attribution model in the past when deliverables could not be separated into units of account. Question 7 - How would an entity determine the appropriate single 1 3 : measure of progress for a combined performance obligation that is satisfied – Agenda paper no. 41] over time? [TRG meeting 13 July 2015 TRG members acknowledged that it may be difficult to appropriately determine a single measure of progress when the entity transfer s goods or services that make up the combined performance obligation over different points of time and/or the entity would otherwise use a different 284 Under Step 2 of the model, a single performance obligation may contain multiple non - distinct goods or services and/or distinct goods or services that were required to be distinct goods or services in order to identify a distinct bundle. This combined with non - bundled performance obligation is referred to as a ‘combined performance obligation’ for the purpose of this discussion. 285 IFRS 15.BC161. Updated October 2018 272 A closer look at IFRS 15, the revenue recognition standard

273 Frequently asked questions (cont’d) - based method versus a labour measure of progress (e.g., a time based - input method) if each promise was a separate performance obligation. Such a determination require s significant judgement, but TRG members generally agreed that the measure of progress s elected is not meant to be a ‘free choice’. Entities need to consider the nature of the overall promise for the combined performance obligation in determining the measure of progress to use. For example, entities should not default to a ‘final deliverab le’ methodology, such that all revenue would be recognised over the performance period of the last promised good or service. Rather, an entity is required to select the single measure of progress that most faithfully depicts the entity’s performance in sa tisfying its combined performance obligation. Some TRG members observed that an entity would need to consider the reasons why goods or services were bundled into a combined performance obligation in order to determine the appropriate pattern of revenue recognition. For example, if a good or service wa s combined with other goods or services because it was not capable of being distinct, that may indicate that it does not provide value or use to the customer on its own. As such, the entity would not contemplate the transfer of that good or service when determining the pattern of revenue recognition for the combined performance obligation. TRG members also generally agreed that, if an appropriately selected single measure of progress does not faithfully depict the economics of y should challenge whether the performance the arrangement, the entit obligation was correctly combined (i.e., there may be more than one performance obligation). Question 7 - 1 4 : Can control of a good or service underlying a performance obligation satisfied over time be transferred a t discrete points in time? [FASB TRG meeting 18 April 2016 – Agenda paper no. 53] FASB TRG members generally agreed that, if a performance obligation meets the criteria for revenue to be recognised over time (rather than at a point in time), control of the underlying good or service is not transferred at discrete points in time. Because control transfers as an entity performs, an entity’s performance (as reflected using an appropriate measure of progress) should not result in the creation of a material asse t in the entity’s accounts (e.g., work in progress). Stakeholders ha queried whether control of a good or service underlying d a performance obligation that is satisfied over time can be transferred at discrete points in time because the standards highlig ht several output methods, including ’milestones reached’, as potentially acceptable methods for measuring progress towards satisfaction of an over - time performance obligation. FASB TRG members generally agreed that an entity could use an output method on ly if that measure of progress correlates to the entity’s performance to date. At the May 2016 IASB meeting, IASB staff indicated support for the conclusions reached in the TRG agenda paper on this issue, noting that it use milestones reached as a measure provides some clarity about when to of progress. Furthermore, the members of the IASB who observed the FASB TRG meeting indicated that the FASB TRG discu ssion on the topic was helpful. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 273

274 Frequently asked questions (cont’d) - 1 : Can an entity use the ‘right to invoice’ practical expedient Question 7 5 for a contract that includes rates that change over the contractual term? [TRG meeting 13 July 2015 Agenda paper no. 40] – TRG members generally agreed that determining whether an entity can o invoice’ practical expedient require apply the ‘right t judgement. They s also generally agreed that it is possible for entities to meet the requirements for the practical expedient in contracts with changing rates, provided that the changes in rates correspond directly t o changes in value to the customer. That is, a contract does not need to have a fixed price per unit for the duration of a contract in order to qualify for the practical expedient. Examples of contracts that might qualify include an IT outsourcing arrange ment with rates that decrease over the contract term as the level of effort to the customer decreases or a multi - year electricity contract that contemplates the forward market price of electricity. However, the SEC Observer also noted that entities need t o have strong evidence that variable prices are representative of value to the customer in order to recognise variable amounts of revenue for similar goods or services. Question 7 1 6 : If an entity determines that it has not met the criteria - to use the ‘right to invoice’ practical expedient (e.g., because there is a substantive contractual minimum payment or a volume discount), can the entity still use the disclosure practical expedient under which an entity can decide not to disclose the am ount of transaction price allocated to remaining performance obligations? [TRG meeting 13 July 2015 – Agenda paper no. 40] See the response to Question 10 - in s ection 10. 4 .1. 8 - 7 : If an entity begins activities on a specifically anticipated Question 7 1 tract either: (1) before it agrees to the contract with the customer; or con (2) before the arrangement meets the criteria to be considered a contract under the standard, how would revenue for those activities be recognised meeting 30 March 2015 – at the date a contract exists? [TRG Agenda paper no. 33] TRG members generally agreed that if the goods or services that ultimately will be transferred meet the criteria to be recognised over time, revenue would be recognised on a cumulative catch - up basis at the ‘co ntract establishment date’, reflecting the performance obligation(s) that are partially or fully satisfied at that time. The TRG agenda paper noted that - up method is considered to be consistent with the the cumulative catch rd that revenue is recognised when (or as) overall principle of the standa an entity transfers control of goods or services to a customer. Question 7 - 1 8 : How sh ould an entity account for fulfilment costs incurred prior to the contract establishment date that are outside the scope of March 2015 ther standard (e.g., IAS 2)? [TRG meeting 30 ano - A genda paper no. 33] 3 ection 9.3.2. 1 s in See the response to Question 9 - Updated October 2018 274 A closer look at IFRS 15, the revenue recognition standard

275 7.2 Control transferred at a point in time October (updated 2018) For performance obligations in which control is not transferred over time, control is transferred as at a point in time. In many situations, the determination that point in time occurs is relatively straightforward. However, in of when other circumstances, this determination is more complex. To help entities determine the point in time when a customer obtains control of a particular good or service, the Board provided the following requirements: Extract from IFRS 15 38. If a performance obligation is not satisfied over time in accordance with paragraphs 35 37, an entity satisfies the performance obligation at a point in – time. To determine the point in time at which a customer obtains control of a promised asset and t he entity satisfies a performance obligation, the entity shall consider the requirements for control in paragraphs 31 – 34. In addition, an entity shall consider indicators of the transfer of control, which include, but are not limited to, the following: (a) The entity has a present right to payment for the asset — if a customer is presently obliged to pay for an asset, then that may indicate that the customer has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset in exchange. (b) — legal title may indicate which The customer has legal title to the asset party to a contract has the ability to direct the use of, and obtain substantially all of the remaining benefits from, an asset or to restrict the acces s of other entities to those benefits. Therefore, the transfer of legal title of an asset may indicate that the customer has obtained control of the asset. If an entity retains legal title solely as protection against the customer’s failure to pay, those r ights of the entity would not preclude the customer from obtaining control of an asset. (c) The entity has transferred physical possession of the asset — the customer’s physical possession of an asset may indicate that the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset or to restrict the access of other entities to those benefits. However, physical possession may not coincide with control of an asset. For example, in some repurchase agreement s and in some consignment arrangements, a customer or consignee may have physical possession of an asset that the entity controls. Conversely, in some bill - and - hold arrangements, the entity may have physical possession of an asset that the customer control s. Paragraphs B64 – B76, B77 – B78 and B79 – B82 provide guidance on accounting for repurchase and hold arrangements, - - agreements, consignment arrangements and bill respectively. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 275

276 Extract from IFRS 15 (cont’d) The customer has the significant risks and rewards of ownership of the (d) — the transfer of the significant risks and rewards of ownership of asset an asset to the customer may indicate that the customer has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. However, when evaluating the risks and rewards of ownership of a promised asset, an entity shall exclude any risks that give rise to a separate performance obligation in addition to the performa nce obligation to transfer the asset. For example, an entity may have transferred control of an asset to a customer but not yet satisfied an additional performance obligation to provide maintenance services related to the transferred asset. The customer h as accepted the asset — the customer’s acceptance of (e) an asset may indicate that it has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. To evaluate the effect of a contractual customer acce ptance clause on when control of an asset is transferred, an entity shall consider the – B86. guidance in paragraphs B83 None of the indicators above are meant to individually determine whether the customer has gained control of the good or service. For exa mple, while shipping terms may provide information about when legal title to a good transfers to the customer, they are not determinative when evaluating the point in time at which - 19 below See Question 7 the customer obtains control of the promised asset. on shipping terms. An entity must consider all relevant for further discussion facts and circumstances to determine whether control has transferred. The IASB also made it clear that the indicators are not meant to be a checklist. Furthermore, not all of t hem must be present for an entity to determine that the customer has gained control. Rather, the indicators are factors that are often present when a customer has obtained control of an asset and the list 286 control. is meant to help entities apply the principle of IFRS 15.38 also states that indicators of control transfer are not limited to those listed above. For exa mple, channel stuffing is a practice that entities sometimes use to increase sales by inducing distributors or resellers to buy substantially more goods than can be promptly resold. To induce the distributors to make such purchases, an entity may offer deep discounts that would have to evaluate as variable consideration in estimating the transaction it price (see section 5.2) . Channel stuffing also may be accompanied by side vide a right unsold return for agreements with the distributors that pro of that is in excess of the normal sales return privileges offered by the goods entity. Significant increases in, or excess levels of , inventory in a distribution channel due to channel stuffing may affect or preclude the a bility to conclude that control of such goods ha s transferred. Entities need to carefully consider the e ith channel xpanded rights of returns offered to customers in connection w stuffing in order to determine whether they prevent the entity from recognis ing revenue at the time of the sales transaction. If an entity uses channel stuffing practices, it should consider whether e disclos ur in its financial statements is required when it expects these practices to materially affect future operating results. For example, if an entity sold , or near , the end of a excess levels into a certain distribution channel at reporting period, it is likely that th os e sales volume wou ld not be sustainable in , future periods That is, sales into that channel may . in fact , slow down in future 286 IFRS 15.BC155. Updated October 2018 276 A closer look at IFRS 15, the revenue recognition standard

277 periods as the excess inventory takes longer to entirely sell through the consider whether disclos e of the channel. In such a case, the entity should ur current and future earnings is effect of the channel stuffing practice on its , if material. required We discuss the indicators in IFRS 15.38 that an entity considers when determining when it transfers control of the promised good or service to the cus tomer in more detail below. Present right to payment for the asset As noted in the Basis for Conclusions, the IASB considered, but rejected specifying a right to payment as an overarching criterion for determining when revenue would be recognised. Therefor e, while the date at which the entity has a right to payment for the asset may be an indicator of the date the customer obtained control of the asset, it does not always indicate that the customer has 287 For example, in some contracts, a customer is obtained control of the asset. - required to make a non refundable upfront payment, but receives no goods or services in return at that time. Legal title and physical possession The term ‘title’ is often associated with a legal definition den oting the ownership of an asset or legally recognised rights that preclude others’ claim to the asset. Accordingly, the transfer of title often indicates that control of an asset has been transferred. Determination of which party has title to an asset doe s not always depend on which party has physical possession of the asset, but without contractual terms to the contrary, title generally passes to the customer at the time of the physical transfer. For example, in a retail store transaction, there is often no clear documentation of the transfer of title. However, it is generally understood that the title to a product is transferred at the time it is purchased by the customer. While the retail store transaction is relatively straightforward, determining when title has transferred may be more complicated in other arrangements. Transactions that involve the shipment of products may have varying shipping terms and may involve third - party shipping agents. In such cases, a clear understanding of the seller’s p ractices and the contractual terms is required in order to make an assessment of when title transfers. As indicated in IFRS 15.38(b), legal title and/or physical possession may be an indicator of which party to a contract has the ability to direct the us e of, and obtain substantially all of the remaining benefits from, an asset or to restrict the access of other entities to those benefits. See Que stion 7 - 19 for further discussion on how shipping terms affect when an entity has transferred control of a g ood to a customer. Risks and rewards of ownership Although the Board included the risks and rewards of ownership as one factor to consider when evaluating whether control of an asset has transferred, it factor does not change emphasised, in the Basis for Conclusions, that this the principle of determining the transfer of goods or services on the basis of 288 control. The concept of the risks and rewards of ownership is based on how the seller and the customer share both the potential gain (the reward) and th e potential loss (risk) associated with owning an asset. Rewards of ownership include the following: 287 IFRS 15.BC148. 288 IFRS 15.BC154. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 277

278 Rights to all appreciation in value of the asset • • Unrestricted usage of the asset • Ability to modify the asset • Ability to transfer or sell the asset • Ability to grant a security interest in the asset Conversely, the risks of ownership include the following: Absorbing all of the declines in market value • • Incurring losses due to theft or damage of the asset • nt Incurring losses due to changes in the business environme (e.g., obsolescence, excess inventory, effect of retail pricing environment) 15.38(d), an entity does not consider risks that give However, as noted in IFRS rise to a separate performance obligation when evaluating whether the entity nership of an asset. For example, an entity does not consider has the risks of ow warranty services that represent a separate performance obligation when evaluating whether it retains the risks of ownership of the asset sold to the customer. Customer acceptance See discu ssion of this indicator in section 7.2.1. the Frequently asked questions Question 7 - 19: How do shipping terms affect when an entity has transferred control of a good to a customer? Under the standard, an entity recognis es revenue only when it satisfies an identified performance obligation by transferring a promised good or service information about when to a customer. While shipping terms may provide to a good tive transfers to the customer, they are not determina legal title when evaluating the point in time at which the customer obtains control of the promised asset. Entities must consider all relevant facts and circumstances to determine whether control has transferred. For example, when the shipping terms are free on board (FOB), entities need carefully consider whether the customer or the entity has the ability to to control the goods during the shipment period. Furthermore, if the entity has the legal or constructive obligation to replace goods that are lost or dama ged in transit, it needs to evaluate whether that obligation influences and obtain substantially all of the r’s ability to direct the use, the custome remaining benefits from the goods. A selling entity’s historical practices also en evaluating whether control of a good has be considered wh need to transferred to a customer because the entity’s practices may override the contractual terms of the arrangement. Updated October 2018 278 A closer look at IFRS 15, the revenue recognition standard

279 Frequently asked questions (cont’d) on factors such as Contractually specified shipping terms may vary depending the mode of transport (e.g., by sea, inland waterway, road, air) and whether s elling entity may utilis the goods are shipped locally or internationally. A e International Commerce Terms ( Incoterms ) to clarify when delivery occurs. Incoterms are a series of pre - defined commercial terms published by the International Chamber of Commerce (ICC) relating to international commercial law. For example, the I n coterm ‘ EXW ’ or ‘ Ex Works ’ means that the selling entity delivers ’ when it places the goods at the disposal of the customer , ‘ either at the seller’s premises or at another named location (e.g., factory, warehouse). The selling entity is not required to load the goods on any collecting vehicle, nor does it need to clear the goods for export (if ap plicable , The See further discussion on the Ex Works Incoterm in section 7.5 ). Incoterm FOB means the seller delivers the goods on board the vessel nominated by “ the buyer at the named port of shipment or procures the goods already so delivered. The risk o f loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment 289 onwards ” . (updated October 2018) 7.2.1 Customer acceptance When determining whether the customer has obtained control of the goods or services, an entity must consider any customer acceptance clauses that require the customer to approve the goods or services before it is obligated to pay for es not accept the goods or services, the entity may not them. If a customer do be entitled to consideration, may be required to take remedial action or may be required to take back the delivered good. The standard provides the following application guidance regarding how to eva luate customer acceptance provisions: Extract from IFRS 15 B84. If an entity can objectively determine that control of a good or service has been transferred to the customer in accordance with the agreed upon - specifications in the contract, then customer acceptance is a formality s determination of when the customer that would not affect the entity’ has obtained control of the good or service. For example, if the customer acceptance clause is based on meeting specified size and weight characteristics, an entity would be able to determine whether those criteria hav e been met before receiving confirmation of the customer’s acceptance. The entity’s experience with contracts for similar goods or services may provide evidence that a good or service provided to the customer is in accordance with the agreed - upon specifica tions in the contract. If revenue is recognised before customer acceptance, the entity still must consider whether there are any remaining performance obligations (for example, installation of equipment) and evaluate whether to account for them separately . 289 for further information. ICC website See the A closer look at IFRS 15, the revenue recognition standard Updated October 2018 279

280 Extract from IFRS 15 (cont’d) B85. However, if an entity cannot objectively determine that the good or service provided to the customer is in accordance with the agreed - upon specifications in the contract, then the entity would not be able to conclude that the customer has obtained control until the entity receives the customer’s acceptance. That is because in that circumstance the entity cannot determine that the customer has the ability to direct the use of, and obtain substantially all of the remaini ng benefits from, the good or service. B86. If an entity delivers products to a customer for trial or evaluation purposes and the customer is not committed to pay any consideration until the trial period lapses, control of the product is not transferred to the customer until either the customer accepts the product or the trial period lapses. Some acceptance provisions may be straightforward, giving a customer the ability to accept or reject the transferred products based on objective criteria specified in the contract (e.g., the goods function at a specified speed). Other acceptance clauses may be subjective or may appear in parts of the contract that do not typically address acceptance matters, such as warranty provisions or indemnification clauses. Profe ssional judgement may be required to determine the effect on revenue recognition of the latter types of acceptance clauses. - Acceptance criteria that an entity cannot objectively evaluate against the agreed upon specifications in the contract preclude an en tity from concluding that a customer has obtained control of a good or service until formal customer sign - off is obtained or the acceptance provisions lapse. However, the entity would contracts for similar goods or servi ces consider its experience with other because that experience may provide evidence about whether the entity is able to objectively determine that a good or service provided to the customer We believe upon specifications in the contract. is in accordance with the agreed - following would represent circumstances in which the entity one or more of the may not be able to objectively evaluate the acceptance criteria: • The acceptance provisions are unusual or ‘non - standard’. Indicators of ‘non - standard’ acceptance terms are: • The duration of the acceptance period is longer than in contracts for similar goods or services. • The majority of the entity ’s contracts lack similar acceptance terms. contract specified requirements that - contains explicit customer • The must be met prior to acceptance. cont The • ract contains a requirement for explicit notification of acceptance (not just deemed acceptance ) . Explicit notification requirements may indicate that the criteria with which the customer is assessing compliance are not objective. In addition, such explici t notification clauses may limit products the time period within which the customer can reject transferred and may require the customer to provide, in writing, the reasons for the rejection of the products by the end of a specified period. When such clauses exist, acceptance can be deemed to have occurred at the end of rejection has not been received the specified time period if notification of from the customer, as long as the customer has not indicated it will reject the products. Updated October 2018 280 A closer look at IFRS 15, the revenue recognition standard

281 In determining whether compliance with the criteria for acceptance can be objectively assessed (and acceptance is only a formality), t he following should be considered: Whether the acceptance terms are standard in arrangements entered into • by the entity . Whether the acceptance is based on the transferred • product performing to standard, published, specifications and whether the entity ca n demonstrate that it has an established history of objectively determining that the product functions in accordance with those specifications. As discussed above, customer acceptance should not be deemed a formality if the acceptance terms are unusual or non - standard. If a contract contains acceptance provisions that are based on customer - specified criteria, it may be difficult for the entity to objectively assess compliance with the criteria and the entity btaining evidence of customer may not be able to recognise revenue prior to o acceptance. However, determining that the acceptance criteria have been met (and, therefore, acceptance is merely a formality) may be appropriate if the entity can demonstrate that its product meets all of the customer’s acce ptance specifications by replicating, before shipment, those conditions under which the customer intends to use the product. I f it is reasonable to expect that the product’s performance (once it has been installed and is operating at the customer’s facil ity) will be different from the performance when it was tested prior to shipment, this acceptance provision will not have been met. The entity, therefore, would not be able to conclude that the customer has obtained control until customer acceptance occur s. Factors indicating that specifications cannot be tested effectively prior to shipment include: • The customer has unique equipment, software or environmental conditions that can reasonably be expected to make performance in that customer’s entity contract . If the environment dif ferent from testing performed by the includes customer acceptance criteria or specifications that cannot be effectively tested before delivery or installation at the customer's site, n be demonstrated that revenue recognition would be deferred until it ca the criteria are met. • transferred are highly complex. The products that are • The entity has a limited history of testing products prior to control accept transferring to the customer or a limited history of having customers products that it has previously tested. contract Determining when a customer obtains control of an asset in a with customer - acceptance criteria requires the use of professional judgement specified ances. The and depends on the weight of the evidence in the particular circumst conclusion could change based on a , such as n analysis of an individual factor the complexity of the equipment, the nature of the interface with the customer's environment, the extent of the entity ’s experience with this type of transaction or a particular clause in the agreement. An entity may need to discuss the situation with knowledgeable project managers or engineers in making such an assessment. In addition, each contract containing customer - specified acceptance criteria may require a sepa rate compliance assessment of whether the acceptance provisions have been met prior to confirmation of the customer’s acceptance. That is, since may not entity different customers may specify different acceptance criteria, a n be able to make one compliance assessment that applies to all contracts because of the variations in contractual terms and customer environments. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 281

282 Even if a includes a standard acceptance clause, if the clause relates to a contract basis previously, a entity new product or one that has only been sold on a limited n may be required to initially defer revenue recognition for the product until it establishes a history of successfully obtaining acceptance. B86 states that , if an entity delivers products to a customer for trial or IFRS 15. evaluation purposes and the customer is not committed to pay any consideration until the trial period lapses, control of the product is not transferred to the customer until either the customer acc epts the product or the trial period lapses. ’ free See further discussion of ’ tr ial periods in Question 3 - 2 in s ection 3.1, including when such arrangements may meet the criteria to be considered a IFRS 15 . contract within the scope of the model in 7.3 Rep urchase agreements Some agreements include repurchase provisions, either as part of a sales contract or as a separate contract that relates to the goods in the original agreement or similar goods. These provisions affect how an entity applies the requirem ents on control to affected transactions. The standard clarifies the types of arrangements that qualify as repurchase agreements: Extract from IFRS 15 B64. A repurchase agreement is a contract in which an entity sells an asset option (either in the same contract or in another and also promises or has the contract) to repurchase the asset. The repurchased asset may be the asset that was originally sold to the customer, an asset that is substantially the t that was originally same as that asset, or another asset of which the asse sold is a component. B65. Repurchase agreements generally come in three forms: (a) n entity’s obligation to repurchase the asset (a forward); a a n entity’s right to repurchase the asset (a call option); and (b) a n (c) hase the asset at the customer’s request entity’s obligation to repurc (a put option). In order for an obligation or right to purchase an asset to be accounted for as a repurchase agreement under IFRS 15, it needs to exist at contract inception, either as a part of the same contract or in another contract. The IASB clarified that an entity’s subsequent decision to repurchase an asset (after transferring control of that asset to a customer) without reference to any pre - existing contractual right would not be accounted for as a repurcha se agreement under the standard. That is, the customer is not obligated to resell that good to the entity as a result of the initial contract. Therefore, any subsequent decision to repurchase the asset does not affect the customer’s ability to control the asset upon initial transfer. However, in cases in which an entity decides to repurchase a good after transferring control of the good to a customer, the Board observed that the entity should carefully consider whether the customer obtained control in the i nitial transaction. Furthermore, it may need to consider the application 290 guidance on principal versus agent considerations (see s ection 4.4). 290 IFRS 15.BC423. Updated October 2018 282 A closer look at IFRS 15, the revenue recognition standard

283 7.3.1 Forward or call option held by the entity 2018) (updated October (i.e., a forward When an entity has the obligation or right to repurchase an asset or call option) , the standard indicates that the customer has not obtained control of the asset. The standard provides the following application guidance: Extract from IFRS 15 a right to repurchase the asset (a B66. If an entity has an obligation or forward or a call option), a customer does not obtain control of the asset because the customer is limited in its ability to direct the use of, and obtain though the substantially all of the remaining benefits from, the asset even customer may have physical possession of the asset. Consequently, the entity shall account for the contract as either of the following: (a) a lease in accordance with IAS 17 Leases if the entity can or must repurchase the asset for an amount that is less than the original selling price of the asset; or (b) a financing arrangement in accordance with paragraph B68 if the entity can or must repurchase the asset for an amount that is equal to or more than the original selling price of the asset. B67. When comparing the repurchase price with the selling price, an entity shall consider the time value of money. The application guidance, in the extract above, requires that an entity account fo r a transaction including a forward or a call option based on the relationship between the repurchase price and the original selling price. The standard indicates that if the entity has the right or obligation to repurchase the asset at a price less than the original sales price (taking into consideration the effects of the time value of money), the entity would account for the transaction as a lease in accordance with IAS 17 (or IFRS 16, when adopted), unless the contract is part of a sale and leaseback transaction. For additional information IFRS: under IFRS 16 on lease accounting Applying , see our publication , A closer 291 . If the entity has the right or obligation to look at the new leases standard repurchase the asset at a price equal to or greater than the original sales price (considering the effects of the time value of money) or if the contract is part of a sale and leaseback transaction, the entity would account for the contract as a financing arrangement , as discussed below . The following graphic depicts this application guidance for transactions that are : s not sale and leaseback transaction Forward or call option < Lease = Original selling price Repurchase price Repurchase price Financing = Original selling price ≥ 291 publication is available at Latest version of th is . www.ey.com/IFRS A closer look at IFRS 15, the revenue recognition standard Updated October 2018 283

284 Under the standard, a transaction with a seller option to repurchase the product treated as a lease or a financing arrangement (i.e., not a sale). This is because is the customer does not have control of the product and is constrained in its ability to direct the use of and obtain substantially all of the remaining benefits from d. Entities cannot consider the likelihood that a call option will be the goo exercised in determining the accounting for the repurchase provision. However, substantive call options are the Board noted in the Basis for Conclusions that non - 292 See fect when a customer obtains control of an asset. ignored and would not af uestion 7 - Q below for an example of a conditional call option that may qualify 20 to be treated as a sale. , nclusions, the Board also observed In the Basis for Co that “T heoretically, a customer is not constrained in its ability to direct the use of and obtain substantially all of the benefits from , the asset if an entity agrees to repurchase, at the prevailing market price, an asset from the customer that is substantially 293 the same and is readily availab ” That is, in such a le in the marketplace. situation, a customer could sell the original asset (thereby exhibiting control - obtain a similar asset in the market place prior to the asset over it) and then re being repurchased by the entity. If a transacti on is considered a financing arrangement under the IFRS 15 , the selling entity continue to recognise the asset. In addition, it record s a financial s liability for the consideration received from the customer. The difference between the consideration received from the customer and the consideration subsequently paid to the customer (upon repurchasing the asset) represents the interest and h olding costs (as applicable) that are recognised over the term of the financing arrangement. If the option lapses unexercised, the entity derecognises the liability and recognises revenue at that time. when effective, IFRS 16 will conseque 15.B66(a) Also note that ntially amend IFRS to specify that, if the contract is part of a sale and leaseback transaction, the entity continues to recognise the asset. Furthermore, the entity recognises er to which a financial liability for any consideration received from the custom 9 would apply. IFRS legacy ed IFRS? from What’s chang requirements in IFRS, the standard requires legacy Consistent with the an entity to consider a repurchase agreement together with the original sales agreement when they are linked in such a way that the substance of the arrangement cannot be understood without reference to the series of 294 transactions as a whole. Therefore, for most entities, the requirement to is consider the two transactions together a change. not The requirement in the standard to distinguish between repurchase agreements that are, in substance, leases or financing arrangements is broadly consistent with legacy IFRS. IAS 18 indicate d that “the terms of the agreement need to be analysed to ascertain whether, in substance, the seller has transferred the risks 295 and rewards of ownership to the buyer.” id However, IAS 18 d not specify how to treat repurchase agreements that represent financing arrangements, except to state that such arrangements d id not give rise to revenue. The refore, the requirements in IFRS 15 may result in a significant change in practice for some entities. 292 IFRS 15.BC427. 293 IFRS 15.BC425. 294 27. IAS 18.13 and SIC - 295 IAS 18.IE5. Updated October 2018 284 A closer look at IFRS 15, the revenue recognition standard

285 How we see it Entities may find the requirements challenging to apply in practice as the standard treats all forwards and call o ptions the same way and does not consider the likelihood that they will be exercised. In addition, since the standard provides lease requirements, it important for entities to is understand the interaction between the lease and revenue standards. The standard provides the following example of a call option: Extract from IFRS 15 Example 62 — Repurchase agreements (IFRS 15.IE315 - IE318) An entity enters into a contract with a customer for the sale of a tangible asset on 1 January 20X7 for CU1 million. Call option: financing se A — Ca The contract includes a call option that gives the entity the right to repurchase the asset for CU1.1 million on or before 31 December 20X7. 20X7 Control of the asset does not transfer to the customer on 1 January because the entity has a right to repurchase the asset and therefore the customer is limited in its ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Consequently, in accordance with paragraph B66(b ) of IFRS 15, the entity accounts for the transaction as a financing arrangement, because the exercise price is more than the original selling price. In accordance with paragraph B68 of IFRS 15, the entity does ses the cash received as not derecognise the asset and instead recogni a financial liability. The entity also recognises interest expense for the difference between the exercise price (CU1.1 million) and the cash received (CU1 million), which increases the liability. apses unexercised; therefore, the entity On 31 December 20X7, the option l derecognises the liability and recognises revenue of CU1.1 million. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 285

286 Frequently asked questions - 20 : When an entity has a conditional call option to remove and Question 7 - of - date perishable goods, expired replace expired products (e.g., out medicine), does the customer obtain control of the products (or is it akin to a right of return)? The standard does not differentiate between conditional call or forward options held by the entity and unconditional ones. Furthermore, it states that a customer does not obtain control of the asset when the entity has a right to repurchase the asset. The presence of call or forward options indicates that control is not transferred because the customer is limited in its ability to direct the use of and obtain substantially all of the remaining benefits from the asset. H owever, in the case of perishable products, an entity’s conditional right to remove and replace expired goods does not necessarily constrain the customer’s ability to direct the use of and obtain substantially all of the remaining benefits from the prod ucts. That is, the entity is not able to remove and replace the products until they expire. Furthermore, the customer has control of the products over their entire useful life. Consequently, we believe it may be reasonable for an entity to conclude tha t control of the initial product does transfer to the customer in this situation and that an entity could consider this right to be a form of a right section 5.4 ). of return (see 7.3.2 Put option held by the customer IFRS 15 indicates that if the custome r has the ability to require an entity to repurchase an asset (i.e., a put option) at a price lower than its original selling price, the entity considers, at contract inception, whether the customer has a significant economic incentive to exercise that rig ht. That is, this determination influences whether the customer truly has control over the asset received. The determination of whether an entity has a significant economic incentive to s whether the arrangement is treated as a lease or exercise its right determine s ection 5.4). An entity must consider a sale with the right of return (discussed in all relevant facts and circumstances to determine whether a customer has a significant economic incentive to exercise its right, including the relationship betwe en the repurchase price to the expected market value (taking into consideration the effects of the time value of money) of the asset at the date of repurchase and the amount of time until the right expires. The standard notes that if the repurchase price i s expected to significantly exceed the market value of the asset, the customer has a significant economic incentive to exercise the put option: • If a customer has a significant economic incentive to exercise its right, the customer is expected to ultimatel y return the asset. The entity accounts for the agreement as a lease because the customer is effectively paying the entity for the right to use the asset for a period of time. However, one leaseback, exception to this would be if the contract is part of a sale and in which case the contract would be accounted for as a financing , arrangement. Note that, when effective, IFRS 16 will consequentially amend IFRS 15.B70 to specify that, if the contract is part of a sale and sset. leaseback transaction, the entity continues to recognise the a Furthermore, the entity recognises a financial liability for any consideration received fromthe customer to which IFRS 9 would apply. Updated October 2018 286 A closer look at IFRS 15, the revenue recognition standard

287 • If a customer does not have a significant economic incentive to exercise its right, the entity accounts for the agre ement in a manner similar to a sale of a product with a right of return. The repurchase price of an asset that is equal to or greater than the original selling price, but less than or equal to the expected market value of the asset, must also be accounte d for as a sale of a product with a right of return, if the customer does not have s ection 5.4 for a significant economic incentive to exercise its right. See a discussion on sales with a right of return. If the customer has the ability to require an en tity to repurchase the asset at a price equal to, or more than, the original selling price and the repurchase price is more than the expected market value of the asset, the contract is in effect a financing arrangement. If the option lapses unexercised, a n entity derecognise s the liability and revenue. recognise s The following graphic depicts this application guidance: Put option No Sale with a right of return Significant economic Repurchase Original selling incentive to < price price exercise? Lease Yes Expected Repurchase Repurchase Original selling Financing and value market = ≥ > price price price of asset No significant Expected Sale with Repurchase economic Repurchase Original market value a right of ≥ = and ≤ and incentive to price price selling price of asset return exercise How we see it IFRS 15 provides application guidance in respect of written put options IFRS 15 IFRS. However, limited guidance under where there was legacy does not provide any guidance on determining whether ‘a significant economic incentive’ exists and judgement may be required to make this determination. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 287

288 The standard provides the following example of a put option: IFRS 15 Extract from Example 62 — Repurchase agreements (IFRS 15.IE315, IE319 - IE321) An entity enters into a contract with a customer for the sale of a tangible asset on 1 January 20X7 for CU1 million. Case B — Put option: lease Instead of having a call option, the contract includes a put option that obliges the entity to repurchase the asset at the customer’s request for CU900,000 on or before 31 December 20X7. The market value is expected to be CU750,000 on 31 December 20X7. At the inception of the contract, the en tity assesses whether the customer has a significant economic incentive to exercise the put option, to determine the accounting for the transfer of the asset (see paragraphs B70 – B76 of IFRS 15). The entity concludes that the customer has a significant econ omic incentive to exercise the put option because the repurchase price significantly exceeds the expected market value of the asset at the date of repurchase. The entity determines there are no other relevant factors to consider when assessing whether the customer has a significant economic incentive to exercise the put option. Consequently, the entity concludes that control of the asset does not transfer to the customer, because the customer is limited in its ability to direct the use of, and obtain substa ntially all of the remaining benefits from, the asset. In accordance with paragraphs B70 – B71 of IFRS 15, the entity accounts for the transaction as a lease in accordance with IAS 17 . Leases 7.3.3 Sales with residual value guarantees An entity that sells equipment may use a sales incentive programme under which it guarantees that the customer will receive a minimum resale amount when it disposes of the equipment (i.e., a residual value guarantee). If the customer holds a put option and has a significant economic incentive to exercise, the customer is effectively restricted in its ability to consume, modify or sell the asset. In contrast, when the entity guarantees that the customer will receive a minimum amount of sales proceeds, the cu stomer is not constrained in its ability to direct the use of, and obtain substantially all of the benefits from, the asset. Accordingly, the Board decided that it was not necessary to expand the application guidance on repurchase agreements to consider g uaranteed 296 amounts of resale. Therefore, it is important for an entity to review all its contracts and make sure that the residual value guarantee is not accomplished through a repurchase provision, such as a put within the contract (e.g., the customer has the right to require the entity to repurchase equipment two years after the date of purchase at 85% of the original purchase price). If a put option is present, the entity would have to use the application guidance in the standard discussed in section 7.3.2 to determine whether the existence of the put option precludes the customer from obtaining control of the acquired item. In such circumstances, the entity would determine whether the customer has a significant economic incentive to exercise the put . If the entity concludes that there is no significant economic incentive, the transaction would be accounted for as a sale with a right of return. Alternatively, if the entity concludes there is 296 IFRS 15.BC427. Updated October 2018 288 A closer look at IFRS 15, the revenue recognition standard

289 a significant economic incentive for the customer to exercis e its right, the transaction would be accounted for as a lease. However, assume the transaction includes a residual value guarantee in which no put option is present. If the entity guarantees that it will compensate the customer (or ‘make whole’) on a qual ifying future sale if the customer receives less than 85% of the initial sale price, the application guidance on repurchase agreements in IFRS 15 would not apply. That is because the entity is not repurchasing the asset. is n eeded to determine the appropriate In such situations, judgement accounting treatment, which will depend on the specific facts and circumstances. In some cases, an entity may need to consider the requirements of other IFRSs to appropriately account for the residual value guarantee. In IFRS 15 may apply to the entire transaction. If other situations, IFRS 15 applies, an entity would need to assess whether the guarantee affects control of the asset transferring, which will depend on the promise to the customer. In some cases, it may not a ffect the transfer of control. In the Basis for Conclusions, the Board noted that ”when the entity guarantees that the customer will receive a minimum amount of sales proceeds, the customer is not constrained in its ability to direct the use of, and obtai n substantially all of the benefits from, 297 the asset.” However, while a residual value guarantee may not affect the transfer of control, an entity would need to consider whether it affects the transaction price (see section 5). While the economics of a re purchase agreement and a residual value guarantee may be similar, the accounting could be quite different. (updated October 7.4 Consignment arrangements 2018) Entities frequently deliver inventory on a consignment basis to other parties (e.g., distributo A consignment sale is one in which physical delivery r, dealer). to a counterparty is not counterparty of a product has occurred, but the required to pay until the product is either resold to an end customer or used by the counterparty . Under such arrangements, the seller (or consignor) retain s the legal title to the merchandise and the counterparty (or consignee) acts as a selling agent. The earns a commission on the products that consignee have been sold and periodically remits the cash from tho se sales, net of the commission it has earned, to the consignor. In addition, consigned products that are not sold or used generally can be returned to the consignor. By shipping on a consignment basis, consignors are better able to market products by movi ng them closer to the end - customer. However, they do so without selling the goods to the intermediary (consignee). 297 IFRS 15.BC431. 89 A closer look at IFRS 15, the revenue recognition standard Updated October 2018 2

290 The standard provides the following application guidance for determining whether an arrangement is a consignment arrangement: RS 15 Extract from IF B78. Indicators that an arrangement is a consignment arrangement include, but are not limited to, the following: t he product is controlled by the entity until a specified event occurs, (a) such as the sale of the product to a customer of the dealer or until a specified period expires; (b) he entity is able to require the return of the product or transfer t the product to a third party (such as another dealer); and he dealer does not have an un (c) t conditional obligation to pay for the product (although it might be required to pay a deposit). Entities entering into a consignment arrangement need to determine the nature of the performance obligation (i.e., whether the obligation is to transfer the product to the consignee or to transfer the product to the end - customer). This determination would be based on whether control of the product passes to the does not relinquish control of the consigned consignee. Typically, a consignor - customer or, in some cases, when product until the product is sold to the end a specified period expires. Consignees co mmonly do not have any obligation to pay for the product, other than to pay the consignor the agreed - upon portion of the sale price once the consignee sells the product to a third party. As a result, for consignment arrangements, revenue generally would no t be recognised when the products are delivered to the consignee because control has not - transferred (i.e., the performance obligation to deliver goods to the end customer has not yet been satisfied). While some transactions are clearly identified as consi gnment arrangement s , there are other less transparent transactions , in which the seller has retained control of the goods, despite no longer having physical possession. Such arrangements may include the shipment of products to distributors that are not re quired (either explicitly or implicitly), or do not have the wherewithal, is sold to the end customer. Judg e ment is to pay for the product until - it necessary in assessing whether the substance of a transaction is a consignment ion of such arrangements often requires a careful . The identificat arrangement analysis of the facts and circumstances of the transaction, as well as an understanding of the rights and obligations of the parties and the seller’s While not required by customary business practices in such arrangements. , we would encourage entities to separately disclose the IFRS 15 or IAS 2 their consigned inventory, if material. amount of 7.5 Bill - and - hold arrangements (updated October 2018) In some sales transactions, the selling entity fulfils its obligations and bills the customer for the work performed, but does not ship the goods until a later date. - and - These transactions, often called bill hold transactions, are usually designed this way at the request of the purchaser for a number of reasons, including its lack of storage capacity or its inability to use the goods until a later date. Whereas in a consignment sale (discussed above in section 7.4) , physical delivery has occurred , but cont rol of the goods ha s not transferred to - and - the customer, the opposite may be true in a bill hold transaction. Updated October 2018 290 A closer look at IFRS 15, the revenue recognition standard

291 What’s chang ed from legacy IFRS? - - hold transaction qualifies for The criteria for determining whether a bill and 298 legacy IFRS. revenue recognition under the st andard are similar to However, consideration of a separate custodial performance obligation (as discussed 15.B80) may be new to IFRS in IFRS preparers, as this was not addressed in IAS 18. The standard provides the following application guid ance with respect to these arrangements: Extract from IFRS 15 - B79. A bill - hold arrangement is a contract under which an entity bills and a customer for a product but the entity retains physical possession of the product until it is transferred to the customer at a point in time in the future. For example, a customer may request an entity to enter into such a contract because of the customer’s lack of available space for the product or because of delays in the customer’s production schedules. B80. An entity shall determine when it has satisfied its performance obligation to transfer a product by evaluating when a customer obtains control of that product (see paragraph 38). For some contracts, control is transferred either when the product is d elivered to the customer’s site or when the product is shipped, depending on the terms of the contract (including delivery and shipping terms). However, for some contracts, a customer may obtain control of a product even though that product remains in an entity’s physical possession. In that case, the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the product even though it has decided not to exercise its right to take physical possession of tha t product. Consequently, the entity does not control the product. Instead, the entity provides custodial services to the customer over the customer’s asset. B81. In addition to applying the requirements in paragraph 38, for a rol of a product in a bill - and - hold customer to have obtained cont arrangement, all of the following criteria must be met: and (a) t he reason for the bill - - hold arrangement must be substantive (for example, the customer has requested the arrangement); y as belonging to the customer; (b) t he product must be identified separatel (c) he product currently must be ready for physical transfer to the t customer; and (d) t he entity cannot have the ability to use the product or to direct it to another customer. B82. If an entity recognises revenue for the sale of a product on a bill - and hold basis, the entity shall consider whether it has remaining - performance obligations (for example, for custodial services) in accordance with paragraphs 22 – 30 to which the entity shall allocate a portion of the transaction price in accordance with paragraphs 73 – 86. 298 IAS 18.IE1. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 291

292 When evaluating whether revenue recognition is appropriate for a bill - - and transaction, an entity must evaluate the application guidance in both hold 15 control has been transferred to the whether IFRS .38 (to determine whether - and - hold customer) and IFRS 15.B81 (to determine all four bill be met are: criteria are met). The criteria that must • - - hold arrangement must be substantive (e.g., the The reason for the bill and hold transaction A bill - and - ested the arrangement). customer has requ initiated by the selling entity typically indicates that a bill - and - hold arrangement is not substantive . We would generally expect the customer to request such an arrangement and the selling entity would need to evaluate the reasons for the request to determine whether the customer ha a substantive business purpose. Judg e ment is required when assessing s this criterion. For example, a customer with an established buying history ss of its normal volume and requests that that places an order in exce the entity retain s the product needs to be evaluated carefully because the request may not appear to have a substantive business purp ose. • The product must be identified separately as belonging to the customer . Even if the entity’s inventory is homogenous, the customer’s product must be segregated from the entity’s ongoing fulfilment operations. • The product currently must be ready for physical transfer to the customer . , revenue In any revenue transac tion recognised at a point in time is recognis ed when an entity has satisfied its performance obligation to transfer control of the product to the customer. If an entity has remaining or effort the entity , costs to develop, manufacture or refine the product may not have satisfied its performance obligation. This criterion does not include the actual costs to deliver a product, which would be normal and customary in most revenue transactions, or if the entity identifies a separate performance obli gation for custodial services , as discussed below. The entity cannot have the ability to use the product or to direct it to • . If the entity has the ability to freely substitute goods to another customer fill other orders, control of the goods has not passed to the buyer. That is, the entity has retained the right to use the customer’s product in a manner that best suits the entity. If an entity concludes that it c an recognis e revenue for a bill - and - hold further consider transaction, 8 2 states that the entity needs t o IFRS 15.B whether it is also providing custodial services for the customer that would be identified as a separate performance obligation in the contract. As discussed in Question 7 - 19 in section 7.2, certain entities may use an Ex orks Incote rm in contracts with customers. Under an Ex W W orks arrangement, the entity's responsibility is to make ordered goods available to the customer at the entity’s premises or another named location . The customer is responsible for arranging , and paying for , shipment of the goods to the desired and bears all of the risks relat ed to the m once they are made location available. s W all Ex Works arrangement e believe that need to be evaluated using the bill - enue recognition is hold criteria discussed above to determine whether rev and - . appropriate prior to shipment Updated October 2018 292 A closer look at IFRS 15, the revenue recognition standard

293 The standard provides the following example to illustrate the application guidance on bill and - hold arrangements: - Extract from IFRS 15 — Bill - Example 63 - hold arrangement (IFRS 15.IE323 - IE327) and An entit y enters into a contract with a customer on 1 January 20X8 for the sale of a machine and spare parts. The manufacturing lead time for the machine and spare parts is two years. Upon completion of manufacturing, the entity demonstrates that the machine and spare parts meet the agreed - upon specifications in the contract. The promises to transfer the machine and spare parts are distinct and result in two performance obligations that each will be satisfied at a point in time. On 31 December 20X9, the customer pays for the machine and spare parts, but only takes physical possession of the machine. Although the customer inspects and accepts the spare parts, the customer requests that t he spare parts be stored at the entity’s warehouse because of its close proximity to the customer’s factory. The customer has legal title to the spare parts and the parts can be identified as belonging to the customer. Furthermore, the entity stores the spare parts in a separate section of its warehouse and the parts are ready for immediate shipment at the customer’s request. The entity expects to hold the spare parts for two to four years and the entity does not have the ability to use the spare parts o r direct them to another customer. The entity identifies the promise to provide custodial services as a performance obligation because it is a service provided to the customer and it is distinct from the machine and spare parts. Consequently, the entity a ccounts for three performance obligations in the contract (the promises to provide the machine, the spare parts and the custodial services). The transaction price is allocated to the three performance obligations and revenue is recognised when (or as) con trol transfers to the customer. Control of the machine transfers to the customer on 31 December 20X9 when the customer takes physical possession. The entity assesses the indicators in paragraph 38 of IFRS 15 to determine the point in time at which of the spare parts transfers to the customer, noting that the entity control has received payment, the customer has legal title to the spare parts and the customer has inspected and accepted the spare parts. In addition, the entity concludes that all of the crite ria in paragraph B81 of IFRS 15 are met, which is necessary for the entity to recognise revenue in a bill - and - hold arrangement. The entity recognises revenue for the spare parts on 31 December 20X9 when control transfers to the customer. The performance obligation to provide custodial services is satisfied over time as the services are provided. The entity considers whether the payment terms include a significant financing component in accordance – with paragraphs 60 65 of IFRS 15. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 293

294 7.6 Recognising reven ue for licences of intellectual property licences for sing revenue from recogni IFRS 15 provides application guidance s in some respects from the general of intellectual property that differ nsing requirements for other promised goods or services. We discuss lice section in detail in 8. 7.7 Recognising revenue when a right of return exists s ection 4.7, a right of return does not represent a separate As discussed in performance obligation. Instead, the existence of a right of return affects rice and the entity must determine whether the customer the transaction p will return the transferred product. Under IFRS 15, as discussed in section 5, an entity estimate s the transaction price and appl ies the constraint to the estimated transaction price. In doing so, it s the products expected to be returned in order to determine the consider amount to which the entity expects to be entitled (excluding consideration for the products expected to be returned). The entity recognise s revenue based on the amounts to which the entity expects to be entitled through to the end of the return period (considering expected product returns). An entity does not recognise the portion of the revenue that is subject to the constraint until the amount is no longer constrained, which could be at the end of the return period or earlier if the entity’s expectations about the products expected to be returned change prior to the end of the return period. The entity recognise the s amount received or receivable that is expected to be returned as a refund liability, representing its obligation to return the customer’s consideration. its estimates at the end of each reporting period. See An entity also update s ections 4.7 and 5.4.1 for further discussion on this topic. s 7.8 Recognising revenue for customer options for additional or services goods s As discussed in ection 4.6, when an entity grants a customer the option to acquire additional goods or services, that option is a separate performance obligation if it provides a material right to the cus tomer that the customer would not receive without entering into the contract (e.g., a discount that exceeds the range of discounts typically given for those goods or services to that class of customer in that geographical area or market). If the option ovides a material right to the customer, the customer has, in effect, paid pr the entity in advance for future goods or services. IFRS 15 requires the entity to allocate a portion of the transaction price to the material right at contract inception (see s ec tion 6.1.5). The revenue allocated to the material right is recognised when (or as) the option is exercised (and the underlying future goods or services are transferred) or when the option expires. material right and is In contrast, if a customer option is not deemed to be a instead a marketing offer, the entity does not account for the option and waits to account for the underlying goods or services until those subsequent purchases occur. Frequently asked questions Question 7 - 21 : How w ould an entity account for the exercise of a material right? That is, would an entity account for it as: a contract modification, a continuation of the existing contract or variable consideration ? [ TRG 30 March 2015 - Agenda paper no. 32] meeting 1 ection 4.6. s in 7 See resp onse to Question 4 - Updated October 2018 294 A closer look at IFRS 15, the revenue recognition standard

295 7.9 Breakage and prepayments for future goods or services (updated 2018) October non refundable payments from its In certain industries, an entity collect - s customers for goods or services that the customer has a right to receive in the future. However, a customer may ultimately leave that right unexercised (often sell gift cards that referred to as ‘breakage’). Retailers, for example, frequently redeemed may not be completely redeemed and airlines sometimes partially or non refundable tickets to passengers who allow the tickets to expire sell - unused. Under IFRS 15.B44 , w hen an entity receives consideration that is attributable to a customer’s unexercised rights, the entity recognises a contract liability full amount prepaid by the customer for the performance obligation equal to the fer, goods or services in the future. to transfer, or to stand ready to trans As es that ther below, an entity derecognis contract liability (and discussed fur revenue ) when it transfers those goods or services and, therefore, recognis es The Board noted that t his application satisfies its performance obligation. requirements guidance requires the same pattern of revenue recognition as the 299 . for customer options (see section 6.1.5) However, since entities may not be required by customers to fully satisfy their IFRS 15.B46 requires that when an entity expects to performance obligations, be entitled to a breakage amount, the expected breakage would be recognised as revenue in proportion to the pattern of rights exercised by the customer. If an entity does not expect to be entitled to a breakage amo unt, it would not recognise any breakage amounts as revenue until the likelihood of the customer 300 exercising its right becomes remote. When estimating any breakage amount, an entity has to consider the constraint on variable consideration, as discussed in ection 5.2.3. That is, if it is highly s probable that a significant revenue reversal would occur for any estimated breakage amounts, an entity would not recognise those amounts until the breakage amounts are no longer constrained. Entities cannot recogni s e estimated breakage as revenue immediately upon that it rejected receipt of prepayment from the customer. The Board noted such an approach because the entity has not performed under the contract. ing revenue would not be a faithful depi ction of the entity’s That is, recognis performance and would understate its obligation to stand ready to provide 301 future goods or services. This would be the case even if an entity has historical evidence to support the view that no further performance will be required for some portion of the customer contract ( s ) . Further more IFRS 15.B47 , regardless of whether a n entity , in accordance with entities would not can demonstrate the ability to reliably estimate breakage, estimate or recognise any amounts attributable to a custom er’s unexercised rights in income (e.g., an unused gift card balance) if the amounts are required to be required to be remitted to another party (e.g., the government) . Such an amount is recognised as a liability. 299 IFRS 15.BC398 . 300 IFRS 15.BC398. 301 . IFRS 15.BC400 A closer look at IFRS 15, the revenue recognition standard Updated October 2018 295

296 Consider the following example to illustr ate how an entity would apply the application guidance to the sale of a gift card that is within the scope above - in 2.4 for further discussion) : of IFRS 15 (see Question 2 9 - Illustration 7 — Accounting for the sale of a gift card 2 Entity A sells a CU500 non - refundable gift card that can be re deemed at any of its retail locations. Any unused balance is not subject to laws that require from the entity to remit the payment to another party . When the gift card is gnis es a contract liabilit y of CU500 (i.e., the full amount sold, Entity A reco that was stomer). No breakage is recognis ed as revenue prepaid by the cu upon sale of the gift card. Scenario A – Entity expects to be entitled to a breakage amount Based on historical redemption rates, Entity A expects 90% of the gift card (or CU450) to be redeemed. That is, Entity A expects breakage of 10% (or CU50). Upon its first use, the customer redeems CU225 of the gift card. That is, 50% of the expected redemption has occurred (i.e., CU225 redemption / CU450 total e xpected redemption). Upon this redemption, Entity A recogn is es revenue and reduces the contract liability by CU250 . This is equal to CU225 for the transfer of goods or services purchased by the customer, as well as breakage of CU25 (50% redemption x CU50 brea kage estimate) that ed in proportion to the exercise of the customer’s rights. is recognis Similar accounting would occur for future redemptions. Scenario B – Entity does not expect to be entitled to a breakage amount Based on historical redemption experiences that customers fully redeem similar gift cards (or possibly the lack of historical experience due to a new gift card program me that means Entity A is unable to estimate the redemption rates), Entity A does not ex pect to be entitled to a breakage amount. Upon its first use of the gift card , the customer redeems CU225. Entity A recognis es revenue and reduces the contract liability by the same amount as the redemption (or CU225). That is, no additional amounts ecognis are r ed for breakage. Similar accounting would occur for future redemptions. If no further rede es the r emaining gift card mptions occur, Entity A recognis balance (or CU 275) as revenue (and reduces the contract liability by the same amount) when the likel ihood of the customer exercising its remaining rights becomes remote. As discussed above, the application guidance on breakage requires that an entity recognise a liability for the full amount of the prepayment. Then, it would recognise breakage on that liability proportionate to the pattern of rights exercised by the customer. If the prepayment element (e.g., the sale of a gift card, loyalty points) is part of a multiple - element arrangement, an entity identified performance to allocate the transaction price between the need s obligations. As a result, the deferred revenue associated with this element would be less than the ‘prepaid’ amount received for the unsatisfied performance obligations. Updated October 2018 296 A closer look at IFRS 15, the revenue recognition standard

297 The following example depicts the sale of goods with loyalty p oints. In this example, the amount allocated to the points (i.e., the ‘prepaid’ element) is less than the stand alone selling price of those points because of the allocation - of the transaction price among the two performance obligations. 15 Extract from IFRS — Customer loyalty programme (IFRS 15.IE267 - IE270) Example 52 An entity has a customer loyalty programme that rewards a customer with one customer loyalty point for every CU10 of purchases. Each point is redeemable for a CU1 discount on any future purchases of the entity’s products. During a reporting period, custome rs purchase products for CU100,000 and earn 10,000 points that are redeemable for future - alone selling price of purchases. The consideration is fixed and the stand the purchased products is CU100,000. The entity expects 9,500 points to be redeemed. The e ntity estimates a stand - alone selling price of CU0.95 per point (totalling CU9,500) on the basis of the likelihood of redemption in accordance with paragraph B42 of IFRS 15. The points provide a material right to customers that they would not receive out entering into a contract. Consequently, the entity concludes that with the promise to provide points to the customer is a performance obligation. The entity allocates the transaction price (CU100,000) to the product and the points on a relative stand - alon e selling price basis as follows: CU - [CU100,000 × (CU100,000 stand Product alone 91,324 selling price ÷ CU109,500)] Points 8,676 [CU100,000 × (CU9,500 stand - alone selling price ÷ CU109,500)] At the end of the first reporting period, 4,500 points have been redeemed and the entity continues to expect 9,500 points to be redeemed in total. The entity recognises revenue for the loyalty points of CU4,110 [(4,500 points ÷ 9,500 points) × CU8,676] and recognises a contract liability of CU4,566 (CU8,676 CU4,110) for the unredeemed points at the end of the first – reporting period. At the end of the second reporting period, 8,500 points have been redeemed cumulatively. The entity updates its estimate of the points that will be redeemed and now expects that 9,700 points will be redeemed. The entity recognises revenue for the loyalty points of CU3,493 {[(8,500 total points redeemed ÷ 9,700 total points expected to be redeemed) × CU8,676 initial allocation] – CU4,110 recognised in the first reporting period}. T he contract liability balance is CU1,073 (CU8,676 initial allocation – CU7,603 of cumulative revenue recognised). , entities As depicted in Example 52 above (i.e., IFRS 15.IE269 - IE270) need to routinely refine and evaluate estimates of gift card redemption rates. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 297

298 Frequently asked questions 22 Question 7 - : Are customers’ unexercised rights (i.e., breakage) a form of variable consideration? Although the breakage application guidance in IFRS 15.B46 specifically refers to the constraint on variable consideration, we do not believe breakage is a form of variable consideration (see s ection 5.2). This is because it does not affect the transaction price. Breakage is a recognition concept (Step 5) that could affect the timing of revenue recognition. It is not a measurement concept (Step 3). For example, the transaction price for a sale of a CU20 gift card is fixed at CU20 regardless of the expected breakage amount. The expected breakage, however, could affect the timing of revenue recognition recognise the expected because an entity is required under IFRS 15.B46 to “ breakage amount as revenue in proportion to the pattern of rights exercised by the customer ” if it expects to be entitled to a breakage amount. Updated October 2018 298 A closer look at IFRS 15, the revenue recognition standard

299 8. Licences of intellectual property for sing revenue from licences IFRS 15 provides application guidance recogni that differs in some respects from the requirements of intellectual property for other promised goods services. Given that licences include a wide array of or e Board decided that an entity need features and economic characteristics, th s to evaluate the nature of its promise to grant a licence of intellectual property in order to determine whether the promise is satisfied (and revenue is recognised) over time or at a point in time. A licence provide s either : • A right to access the entity’s intellectual property throughout the licence which results in revenue that is recognised over time period, Or A right to use the entity’s intellectual property as it exists at the point in • time in which the licence is granted, which results in revenue that is recognised at a point in time IFRS 15.B52 provide s examples of intellectual property that may be licensed to a customer oftware and technology, media and entertainment , including s (e.g., motion pictures and music), franchises, patents, trademarks and copyrights. The application guidance provided on lice nces of intellectual property is only applicable to licences that are distinct. When the licence is the only promised item (either explicitly or implicitly) in the contract, the application guidance is clearly applicable to that licence. The assessment as to whether the contract includes a distinct licence of intellectual property may be straightforward for many contracts. However, if there are multiple promises in a contract, entities may have to more carefully evaluate the nature of the rights conveyed. Licences of intellectual property are frequently included in multiple - element or services that may be arrangements with promises for additional goods applies the requirements explicit or implicit. In these situations, an entity first of Step 2 of the model to determine whether the licence of intellectual property is distinct, as discussed in section 4 and s ection 8.1. For most licences that are not distinct, an entity would follow the general on of revenue requirements in Step 5 of the model to account for the recogniti for the performance obligation that includes the licence (i.e., the requirements in IFRS 15.31 - 36 to determine whether the performance obligation transfers over time or at a point in time, as discussed in s ections 7.1 and 7.2). Furthermore, t he IASB noted in the Basis for Conclusions that there may be some situations in which, even though the licence is not distinct from the good or service transferred with the licence, the licence is the primary or dominant component (i.e., the predominant item) of the combined performance 302 In such situations, the IASB indicated that the application obligation. guidance for licences still applie s . The Board provided no application guidance or bright lines for determining when a licence is the primary or dominant component. However, the IASB referred to an example in the Basis for 303 Conclusions to illustrate this concept further. See s ection 8.2.1 for further discussion. The determination of whether a licence is the predominant component may be obvious in some cases, but not in others. Therefore, entities may need to exercise significant judgement and consider both qualitative and quantitative factors. 302 IFRS 15.BC407. 303 IFRS 15.BC414X. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 299

300 8.1 Identifying performance obligations in a licensing arrangement property frequently include explicit or Contracts for licences of intellectual services (e.g., equipment, when implicit promises for additional goods and - or - . Consistent with Step 2 of if available upgrades, maintenance and installation) section 4), entities need to app ly the requirements the general model (see - 30 when a contract with on identifying performance obligations in IFRS 15.22 a customer includes a licence of intellectual property and other promised goods lectual or services in order to appropriately determine whether the licence of intel property and the other promises are distinct (i.e., are separate performance obligations). As discussed in s ection 4.2, the standard outlines a two - step process for determining whether a promised good or service (including a licence of intellectual property) is distinct and, therefore, is a performance obligation: (a) Consideration of the individual good or service (i.e., whether the good or service is capable of being distinct) And (b) Consideration of whether the good or service is separately identifiable from other promises in the contract (i.e., whether the promise to transfer the good or service is distinct in th e context of the contract) s to determine To conclude that a good or service is distinct, an entity need that the good or service is both capable of being distinct and distinct in the of the contract. These requirements need to be applied to determ ine context whether a promise to grant a licence of intellectual property is distinct from other promised goods or services in the contract. Therefore, entities are required the customer can benefit from a licence of intellectual to assess whether property on it s own or together with readily available resources (i.e., whether it is capable of being distinct) and whether the entity’s promise to transfer a licence of intellectual property is separately identifiable from other promises The in the contract (i.e., whet her it is distinct in the context of the contract). to assessment of whether a licence of intellectual property is distinct need s be based on the facts and circumstances of each contract . 8.1.1 Licences of intellectual property that are distinct Licences are frequently capable of being distinct (i.e., the first criteria of a distinct good or service) as a customer can often obtain at least some benefit from the licence of intellectual property on its own or with other readily available resources. Consider Example 11, Case A, from the standard (extracted in s full in ection 4.2.3), which includes a contract for a software licence that is transferred along with installation services, technical support and unspecified The installati on service is routinely performed by other entities software updates. and does not significantly modify the software. The software licence is delivered before the other goods or services and remains functional without the updates and technical support. The entity concludes that the customer can benefit from services either on their own or together with other goods each of the goods or or services that are readily available. That is, each good or service, including the software licence, is capable of being distinct under IF RS 15.27. If an entity determines that a licence of intellectual property and other promised goods or services are capable of being distinct, the second step in the evaluation is to determine whether they are distinct in the context of the contract. As pa rt of Updated October 2018 300 A closer look at IFRS 15, the revenue recognition standard

301 this evaluation, an entity considers the indicators for whether the goods or services are not separately identifiable, including whether: (1) The entity provides a significant service of integrating the licence and other goods or services into a combin ed output or outputs. The licence and other goods or services significantly modify or customise (2) each other. Or (3) The licence and other goods or services are highly interdependent or highly interrelated, such that the entity would not be able to fulfil its p romise to transfer the licence independently of fulfilling its promise to transfer the other goods or services to the customer. Continuing with Example 11, Case A, discussed above, the entity considers the separately identifiable principle and factors in I FRS 15.29 and determines that the promise to transfer each good and service, including the software licence, is separately identifiable. In reaching this determination, the entity considers that the installation services are routine and can be obtained fr om other providers. In addition, the entity considers that, although it integrates the software into the customer's system, the software updates do not significantly affect the customer's ability to use and benefit from the software licence during the li cence period. Therefore, neither the installation services nor the software updates significantly affect the customer’s ability to use and benefit from the software licence. The entity further observes that none of the promised goods or services significan tly modify or customise one another and the entity is not providing a significant service of integrating the software and services into one combined output. Lastly, the software and the services are not deemed to be highly interdependent or highly interre lated because the entity would be able to fulfil its promise to transfer the initial software licence independent from its promise to subsequently provide the installation service, software updates and the technical support. The following example from the standard also illustrates a contract for which a licence of intellectual property is determined to be distinct from other promised goods or services: Extract from IFRS 15 — Identifying a distinct licence (IFRS 15.IE281, IE285 - IE288) Example 56 An entity, a pharmaceutical company, licenses to a customer its patent rights to an approved drug compound for 10 years and also promises to manufacture the drug for the customer. The drug is a mature product; therefore the entity will not undertake any a ctivities to support the drug, which is consistent with its customary business practices. Licence is distinct Case B — In this case, the manufacturing process used to produce the drug is not re the unique or specialised and several other entities can also manufactu drug for the customer. The entity assesses the goods and services promised to the customer to determine which goods and services are distinct, and it concludes that the criteria in paragraph 27 of IFRS 15 are met for each of the licence and the A closer look at IFRS 15, the revenue recognition standard Updated October 2018 301

302 (cont’d) tract from IFRS 15 Ex manufacturing service. The entity concludes that the criterion in paragraph 27(a) of IFRS 15 is met because the customer can benefit from the licence together with readily available resources other than the entity's manufacturing service (because there are other entities that can provide the manufacturing service), and can benefit from the manufacturing service together with the licence transferred to the customer at the start of the contract. The entity also concl udes that its promises to grant the licence and to provide the manufacturing service are separately identifiable (ie the criterion in paragraph 27(b) of IFRS 15 is met). The entity concludes that the licence and the manufacturing service are not inputs to a combined item in this contract on the basis of the principle and the factors in paragraph 29 of IFRS 15. In reaching this conclusion, the entity considers that the customer could separately purchase the licence without significantly affecting its abi lity to benefit from the licence. Neither the licence, nor the manufacturing service, is significantly modified or customised by the other and the entity is not providing a significant service of integrating those items into a combined output. The entity further considers that the licence and the manufacturing service are not highly interdependent or highly interrelated because the entity would be the licence independently of fulfilling its able to fulfil its promise to transfer promise to subsequently manufacture the drug for the customer. Similarly, the entity would be able to manufacture the drug for the customer even utilised if the customer had previously obtained the licence and initially a different manufacturer. Thus, although the manufacturing service necessarily depends on the licence in this contract (ie the entity would not provide the manufacturing service without the customer having obtained he manufacturing service do not significantly the licence), the licence and t affect each other. Consequently, the entity concludes that its promises to grant the licence and to provide the manufacturing service are distinct and that there are two performance obligations: (a) licence of pat ent rights; and manufacturing service. (b) The entity assesses, in accordance with paragraph B58 of IFRS 15, the nature of the entity's promise to grant the licence. The drug is a mature product (ie it has been approved, is currently being manufactured and h as been sold commercially for the last several years). For these types of mature products, the entity's customary business practices are not to undertake any activities to support the drug. The drug compound has significant stand - alone functionality (ie its ability to produce a drug that treats a disease or condition). Consequently, the customer obtains a substantial portion of the benefits of the drug compound from that functionality, rather than from the entity's ongoing activities. The entity conclude s that the criteria in paragraph B58 of IFRS 15 are not met because the contract does not require, and the customer does not reasonably expect, the entity to undertake activities that significantly as rights. In its affect the intellectual property to which the customer h 15, the entity does assessment of the criteria in paragraph B58 of IFRS not take into consideration the separate performance obligation of promising to provide Updated October 2018 302 A closer look at IFRS 15, the revenue recognition standard

303 Extract from IFRS 15 (cont’d) a manufacturing service. Consequently, the nature of the entity's promise in transferring the licence is to provide a right to use the entity's intellectual property in the form and the functionality with which it exists at the point in time that it is granted to the customer. Consequently, the entity accounts for the licence as a performance obligation satisfied at a point in time. The entity applies paragraphs 31 38 of IFRS 15 to determine whether the – manufacturing service is a performance obligation s atisfied at a point in time or over time. 8.1.2 Licences of intellectual property that are not distinct The licences of intellectual property included in the examples above were determined to be distinct, as they met the two criteria of IFRS 15.27. In other situations, a licence of intellectual property may not be distinct from other promised goods or services in a contract, either because it is not capable of being distinct and/or it is not separately identifiable. IFRS 15.B54 requires that a licence t hat is not distinct from other promised goods or services in a contract be combined into a single performance obligation. It also identifies two examples of licences of intellectual property that are not distinct from other goods or services, as follows: • A licence that is a component of, and integral to the functionality of, a tangible good in conjunction • A licence that t he customer can benefit from , but only with a related service (e.g., as a result of the entity granting a licence, the customer has ac cess to an online service provided by the entity) In both examples, a customer only benefits from the combined output of the licence of intellectual property and the related good or service. Therefore, the licence is not distinct and would be combined with those other promised goods or services in the contract. The standard includes other examples of licences of intellectual property that are not distinct, which are combined with other promised goods or services because the customer can only benefit from t he licence in conjunction with a related service (as described in IFRS 15.B54(b)). For example, Example 55 and ection Example 56, Case A (extracted in full in s 8.2.1) illustrate contracts that include licences of intellectual property that are not distinct from other goods or services promised to the customer . When an entity is required to bundle a licence of intellectual property with other promised goods or services in a contract, it often need s to consider the licensing application guidance to help determine the nature of its promise to the customer when the licence is the predominant item in the combined ection 8.2.4 for further discussion on applying performance obligation. See s guidance to such performance obligations. the licensing application A closer look at IFRS 15, the revenue recognition standard Updated October 2018 303

304 8.1.3 Contractual restrictions Some licences contain substantive contractual restrictions on how the customer may employ a licence. The standard explicitly states that restrictions affect the licensor’s determination of whether of time, geography or use do not the promise to transfer a licence is satisfied over time or at a point in time, as follows: Extract from IFRS 15 B62. An entity shall disregard the following factors when determining whether a licence provides a right to access the entity's intellectual property or a right to use the entity's intellectual property: (a) Restrictions of time, geographical region or use — those restrictions define the attributes of the promised licence, rather than define whether the entity satisfies its performance obligation at a point in time or over time. While stakeholders acknowledged that IFRS 15.B62 is clear that restrictions of time, geographical region or use do not affect the licensor’s determination about whet her the promise to transfer a licence is satisfied over time or at a point in time, some stakeholders thought that the standard was unclear about whether particular types of contractual restrictions would affect the identification of the promised goods or services in the contract. For example, an arrangement might grant a customer a licence to a well - known television programme or movie for a period of time (for example, three years), but the customer might be restricted in how often it can show that licens ed content to only once per year during each of those three years. In this instance, stakeholders thought that it may be unclear whether contractual restrictions affect the entity’s identification of its promises in the contract (i.e., do the airing restr ictions affect whether the entity has granted one licence or three 304 licences?). explained that contracts that include In considering this issue further, the IASB a promise to grant a licence to a customer require an assessment of the promises in the contr act using the criteria for identifying performance 305 obligations, as is the case with other contracts. This assessment is done before applying the criteria to determine the nature of an entity’s promise in 306 granting a licence. In the Basis for Conclusions, the IASB further explained that they considered Example 59 in the standard (see extract in s ection 8.3.2) in the context of this issue. The entity concludes that its only performance obligation is to grant the to use the music recording. When, where and how the right customer a right can be used is defined by the attributes of time (i.e., two years), geographical scope (i.e., Country A) and permitted use (i.e., in commercials). If, instead, the entity had granted the customer r ights to use the recording for two different time periods in two geographical locations, for example, years X1 – X3 in Country A and years X2 – X4 in Country B, the entity would need to use the criteria for identifying performance obligations in IFRS 15.27 – to determine 30 whether the contract included one licence that covers both countries or 307 separate licences for each country. 304 IFRS 15.BC414O. 305 IFRS 15. BC405 – BC406. 306 IFRS 15.414P. 307 IFRS 15.BC414Q. Updated October 2018 304 A closer look at IFRS 15, the revenue recognition standard

305 Consequently, the entity considers all of the contractual terms to determine whether the promised rights result in the transfer to the customer of one or more licences. In making this determination, judgement is needed to distinguish between contractual provisions that create promises to transfer rights to use the entity’s intellectual property from contractual provisions that establish when, where and how those rights may be used. Therefore, in the Board’s view, the clarifications made to the requirements on identifying performance 308 15.22 – 30 provide sufficient guidance to entities. obligations in IFRS How we see it We believe a critical part of the evaluation of contractual restrictions is whether the lifting of a restriction at a future date requires an entity to grant additional rights to the customer at that future date in order to fulfil its promises under the contract. The presence of a requirement to grant additional rights to the customer indicates that there may be multiple for under Step 2 of performance obligations that need to be accounted the model. Entities may need to use signi ficant judgement to distinguish between a single promised licence with multiple attributes and a licence that contains multiple promises to the customer that may be separate performance obligations. FASB differences ASC 606 requires that entities disting uish between contractual provisions that define the attributes of a single promised licence (e.g., restrictions of time, geography or use) and contractual provisions that require them to transfer additional goods or services to customers (e.g., additional rights to use or access intellectual property). Contractual provisions that are attributes of a promised licence define the scope of a customer’s rights to intellectual property and do not affect whether a performance obligation is satisfied at a point i n time or over time. Nor do they affect the number of performance obligations in the contract. The IASB decided not to clarify the requirements for identifying performance obligations in a contract containing one or more licences since it had 309 e general requirements for identifying performance obligations. clarified th As a result, ASC 606 includes guidance on contractual restrictions that differs from the requirements in IFRS 15. However, the IASB noted in the Basis for Conclusions that, consistent with t 606, an entity he ASC need s to apply the requirements in Step 2 of the general model on identifying performance obligations when distinguishing between contractual provisions that create promises to transfer additional rights from those that are merely attributes of a licence that establish when, 310 where and how the right may be used. Under both IFRS 15 and ASC 606, an entity may need to apply significant judgement to distinguish between a single promised licence with multiple attributes and a licence that contains multiple promises to the customer that may be separate performance obligations. 308 IFRS 15.BC414P. 309 IFRS 15.BC414P. 310 IFRS 15.BC414P. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 305

306 8.1.4 Guarantees to defend or maintain a patent IFRS 15 states that a guarantee to defend or maintain a patent does not represent a per formance obligation in a licensing contract. Furthermore, this type of guarantee does not affect the licensor’s determination as to whether the licence provides a right to access intellectual property (satisfied over time) or a right to use intellectual pr operty (satisfied at a point in time). The requirements for guarantees to defend or maintain a patent are included in the following extract from the standard: Extract from IFRS 15 B62. An entity shall disregard the following factors when determining whether a licence provides a right to access the entity's intellectual property or a right to use the entity's intellectual property: (a) ... (b) Guarantees provided by the entity that it has a valid patent to intellectual property and that it will defend that patent from unauthorised use — a promise to defend a patent right is not a performance obligation because the act of defending a patent protects the value of the entity's intellectual property assets and provides assurance to the customer that the licence transferred meets the specifications of the licence promised in the contract. It is not unusual for intellectual property arrangements to include a clause that requires a licensor to defend and maintain related patents. While patent defen e and mainten c ance is a continuing obligation, it is an obligation to ensure the licensee can continue to use the intellectual property as intended, 15 that and, as discussed above, is not a promised good or service under IFRS should be evaluated under Step 2. However, if there are questions regarding the validity of a patent at the time a licence arrangement is entered into, licens ors need to consider whether that component of the arrangement meets the attributes to be considered a contract within the scope of the model (see section 3.1). Furthermore, as discussed above, because such a provision is to ensure that the licensee can continue to use the intellectual property as intended, it is - type warranty discussed in section 9.1 (i.e., a warranty similar to an assurance that promises the customer that the delivered product is as specified in the contract). Assurance - type warranties are not within the scope of IFRS 15 and, as stated in IFRS 15.B30, would be accounted for in accordance with the requirements for product warranties in IAS 37. Frequently asked questions Question 8 - 1: How should entities account for mod ifications to licences of intellectual property? A licence provides a customer with a right to use or a right to access the intellectual property of an entity. The terms of each licence of intellectual property are defined by the contract, which establishes the customer’s rights that only ea of use). We believe that when a contract (e.g., period of time, ar includes a licence of intellectual property is modified, the additional and/or modified licence of intellectual property is distinct from the original licence always differ from those the new and/or modified rights will because conveyed by the original licence. Updated October 2018 306 A closer look at IFRS 15, the revenue recognition standard

307 Frequently asked questions (cont’d) The standard contains requirements on accounting for contract modification (see ection 3.4) and it requires that a modification in which the additional s promised goods or services are distinct be accounted for on a prospective basis, as follows: The modification is • accounted for as a separate contract if the additional consideration f rom the modification reflects the new licence’s stand - alone selling price in accordance with IFRS 15.20 (b) . • If the additional consideration does not reflect the stand - alone selling price of the new licence, the modification is accounted for in accordance (a) . with IFRS 15.21 For a modification accounted for as a termination of the original contract and creation of a new contract in accordance with IFRS 15.21(a), any revenue recognised to date under the original contract is not adjusted. At the date of the modification, the remaining unrecognised transaction price from the original contract (if any) and the additional transaction price from the new contract are allocated to the remaining performance obligation(s) in the new contract. Any revenue allocated to a performance obligation created at the modification date for the renewal or extension of a licence would be recognised when (or as) that performance obligation is satisfied, which may not be until the beginning of the renewal or extension period (see 8.4). s ection 8.2 Determining the nature of the entity’s promise in granting a licence Entities need to evaluate the nature of a promise to grant a licence of intellectual property in order to determine whether the promise is satisfied (and revenue is recognised) over time or at a point in time. In order to help entities in determining whether a licence provides a customer with a right to access or a right to use the intellectual property (which is important when determining the period of performance and, therefore, ection 8.3), the Board provided the timing of revenue recognition see s – the following application guidance: Extract from IFRS 15 B58. The nature of an entity’s promise in granting a licence is a promise to provide a right to access the entity’s intellectual property if all of the following criteria are met: (a) t he contract requires, or the customer reasonably expects, that the entity will undertake activities that significantly affect the intellectual property to which the cu stomer has rights (see paragraphs B59 and B59A); (b) t he rights granted by the licence directly expose the customer to any positive or negative effects of the entity’s activities identified in paragraph B58(a); and hose activities do not result in the transfer of a good or a service to t (c) the customer as those activities occur (see paragraph 25). A closer look at IFRS 15, the revenue recognition standard Updated October 2018 307

308 Extract from IFRS 15 (cont’d) B59. Factors that may indicate that a customer could reasonably expect that an entity will undertake activities that significantly affect the intellectual property include the entity’s customary business practices, published policies or specific statements. Although not determinative, the existence of a shared economic interest (for example, a s ales - based royalty) between the entity and the customer related to the intellectual property to which the customer has rights may also indicate that the customer could reasonably expect that the entity will undertake such activities. B59A. An entity’s acti vities significantly affect the intellectual property to which the customer has rights when either: (a) t hose activities are expected to significantly change the form (for example, the design or content) or the functionality (for example, the ability to perf orm a function or task) of the intellectual property; or (b) t he ability of the customer to obtain benefit from the intellectual property is substantially derived from, or dependent upon, those activities. For example, the benefit from a brand is often derived from, or dependent upon, the entity’s ongoing activities that support or maintain the value of the intellectual property. Accordingly, if the intellectual property to which the customer has rights has alone functionality, a substantial portion of the benefit of significant stand - that intellectual property is derived from that functionality. Consequently, the ability of the customer to obtain benefit from that intellectual property se would not be significantly affected by the entity’s activities unless tho activities significantly change its form or functionality. Types of intellectual property that often have significant stand - alone functionality include software, biological compounds or drug formulas, and completed media evision shows and music recordings). content (for example, films, tel In providing this application guidance, the Board decided to focus on the characteristics of a licence that provides a right to access intellectual property. If the licensed intellectual property does not have those characteristics, it provides a right to use intellectual property, by default. This analysis is focused on situations in which the underlying intellectual property is subject to change over the licence period. an entity’s promise is a right The key determinants of whether the nature of to access the entity’s intellectual property whether: (1) the entity is required are to undertake activities that affect the licensed intellectual property (or the customer has a reasonable expectation that the entity will d o so); and (2) the customer is exposed to positive or negative effects resulting from those changes. It is important to note that when an entity is making this assessment, it excludes the effect of any other performance obligations in the contract. For ex ample, if an entity enters into a contract to license software and provide access to any future upgrades to that software during the licence period, the entity first s determine whether the licence and the promise to provide future updates erformance obligations. If they are separate, when the entity are separate p considers whether it has a contractual (explicit or implicit) obligation to undertake activities to change the software during the licence period, it ed with the performance obligation any changes and activities associat exclude s to provide future upgrades. Updated October 2018 308 A closer look at IFRS 15, the revenue recognition standard

309 While the activities considered in this assessment do not include those that are a performance obligation, the activities can be part of an entity’s ongoing ordinary activities and customary business practices (i.e., they do not have to be activities the entity is undertaking specifically as a result of the contract with the customer). In addition, the IASB noted in the Basis for Conclusions that the - existence of a shared economic interest bet ween the parties (e.g., sales based - based royalties) may be an indicator that the customer has a or usage 311 reasonable expectation that the entity will undertake such activities. After an entity has identified the activities for this assessment, it must det ermine if those activities significantly affect the intellectual property to which the customer has rights. The standard clarifies that such activities significantly affect the intellectual property if they: Significantly change the form (e.g., design or c ontent) or functionality • (e.g., the ability to perform a function or task) of the intellectual property Or • Affect the ability of the customer to obtain benefit from the intellectual property (e.g., the benefit from a brand is often derived from, or depen dent upon, the entity’s ongoing activities that support or maintain the value of the intellectual property) If the intellectual property has significant stand - alone functionality, the standard clarifies that the customer derive a substantial portion of th e benefit s of that intellectual property from that functionality. As such, “the ability of the customer to obtain benefit from that intellectual property would not be significantly affected by the entity’s activities unless those activities 312 significantly change its form or functionality.” Therefore, if the intellectual is property has significant stand - alone functionality, revenue recognised at a point in time. Examples of types of intellectual property that may have significant stand alone functionality that are mentioned in the standard include - software, biological compounds or drug formulas, and completed media content. The IASB has not defined the term ‘significant stand - alone functionality’, but has made clarifications to the examples in the standar d to illustrate when the intellectual property to which the customer has rights may have significant - alone functionality. In some cases, it will be clear when intellectual stand property has significant stand - alone functionality. If there is no significant stand - alone functionality, the benefit to the customer might be substantially derived from the value of the intellectual property and the entity’s activities to support or maintain that value. The IASB noted, however, that an entity may need to apply judg ement to determine whether the intellectual property to 313 - which the customer has rights has significant stand alone functionality. How we see it It is important for entities that provide licences of intellectual property to their customers to appropriately identify the performance obligations as part of Step 2 of the model because those conclusions may directly affect their evaluation of whether th e entity’s activities significantly change the form or functionality of the intellectual property or affect the ability of the customer to obtain benefit from the intellectual property . 311 IFRS 15.BC413. 312 IFRS 15.B59A. 313 IFRS 15.BC414I. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 309

310 FASB differences ASC 606 requires entities to classify intellectual property Unlike IFRS 15, to determine the nature of the entity’s promise in in one of two categories granting a licence : (a) Functional : This intellectual property has significant stand - alone functionality (e.g., many types of software, completed media content uch as films, television shows and music). Revenue for these licences s is recognised at the point in time when the intellectual property is made available for the customer’s use and benefit if the functionality is not expected to change substanti ve ly as a r esult of the licensor’s ongoing activities that do not transfer another good or service to the customer. If the functionality of the intellectual property is expected to substantively change because of the activities of the licensor that do not transfer pr omised goods or services and the customer is contractually or practically required to use the latest version of the intellectual property, revenue for the licence is recognised over time. The FASB noted in its Basis for Conclusions on ASU 2016 - 10 that it expects entities meet the criteria to recognise licences of functional to intellectual property over time infrequently, if at all. (b) Symbolic : This intellectual property does not have significant stand - alone functionality (e.g., brands, team and trade na mes, character images). The utility of symbolic intellectual property is derived from the licensor’s ongoing or past activities (e.g., activities that support the value of character images licensed from an animated film). Revenue from these licences is rec ognised over time as the performance obligation is satisfied (e.g., over the licence period). The IASB and FASB agreed that their approaches generally result in consistent answers, but the Boards acknowledged that different outcomes may arise due to the different approaches when entities license brand names that no longer have any related ongoing a ctivities (e.g., the licence to the brand name of a defunct sports team, such as the Brooklyn Dodgers). Under the FASB’s approach, a licence of a brand name would be classified as symbolic intellectual property and revenue would be recognised over time, r egardless of whether there are any related ongoing activities. Under the IASB’s approach, revenue is recognised at a point in time if there are no ongoing activities that significantly affect 314 the intellectual property. 8.2.1 Applying the licensing application guidance to a single (bundled) performance obligation that includes a licence of intellectual property IFRS 15 does not explicitly state that an entity need s to consider the nature of revenue recognition its promise in granting a licence when applying the general model to performance obligations that are comprised of both a licence (that is not distinct) and other goods or services. However, the Board clarified in the Basis for Conclusions that to the extent that an entity is required to combine a licence with other promised goods or services in a single performance obligation and the licence is the primary or dominant component (i.e., the predominant item) of that performance obligation , the entity need s to consider the licensing application gui dance to help determine the nature of its promise to the 315 customer. 314 IFRS 15.BC414K, BC414N. 315 IFRS 15.BC407. Updated October 2018 310 A closer look at IFRS 15, the revenue recognition standard

311 If the licence is a predominant item of a single performance obligation, entities need to consider the licensing application guidance when: (a) Determining whether the performance obligation is satisfied over time or at a point in time And Selecting an appropriate method for measuring progress of that (b) performance obligation if it is satisfied over time Considering the nature of an entity’s promise in granting a licence that is part of a sing le combined performance obligation is not a separate step or evaluation in the revenue model. Rather, it is part of the overall requirements in Step 5 of the model to determine whether that single performance obligation is satisfied over in time and the appropriate measure of progress toward the time or at a point satisfaction, if it is satisfied over time. The Board did not provide application guidance or bright lines for determining when a licence is the primary or dominant (i.e., the predominant) compone nt. However, the IASB explained in the Basis for Conclusions that, in some instances, not considering the nature of the entity’s promise in granting a licence that is combined with other promised goods or services in a single performance obligation would result in accounting that does not best reflect the entity’s performance. For example, consider a situation where an year service entity grants a 10 - year licence that is not distinct from a one - a vides access to rrangement. The IASB noted that a distinct licence that pro an entity’s intellectual property over a 10 - year period could not be considered completely satisfied before the end of the access period. The IASB observed in that example that it is, therefore, inappropriate to conclude that a single per formance obligation that includes that licence is satisfied over the one - 316 year period of the service arrangement. The standard includes examples that illustrate how an entity applies the licensing application guidance to help determine the nature of a pe rformance obligation that includes a licence of intellectual property and other promised goods or services. In Example 56, Case A (extracted below), an entity licences the patent rights for an approved drug compound to its customer and also promises to manufacture the drug for the customer. The entity considers that no other entity can perform the manufacturing service because of the highly specialised nature of the manufacturing process. Therefore, the licence cannot be purchased separately from th e manufacturing service and the customer cannot benefit from the licence on its own or with other readily available resources (i.e., the licence and the manufacturing service are not capable of being distinct). Accordingly, the entity’s promises to grant t he licence and to manufacture the drug are accounted for as a single performance obligation, as follows: 316 IFRS 15.BC414X. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 311

312 Extract from IFRS 15 Example 56 — Identifying a distinct licence (IFRS 15.IE281 - IE284) An entity, a pharmaceutical company, licenses to a customer its patent rights to an approved drug compound for 10 years and also promises to manufacture the drug for the customer. The drug is a mature product; therefore the entity will not undertake any a ctivities to support the drug, which is consistent with its customary business practices. Case A — Licence is not distinct In this case, no other entity can manufacture this drug because of the highly ult, the licence specialised nature of the manufacturing process. As a res cannot be purchased separately from the manufacturing services. The entity assesses the goods and services promised to the customer to determine which goods and services are distinct in accordance with paragraph 27 of IFRS 15. The entity determines that the customer cannot benefit from the licence without the manufacturing service; therefore, the criterion in paragraph 27(a) of IFRS 15 is not met. Consequently, the licence nts for and the manufacturing service are not distinct and the entity accou the licence and the manufacturing service as a single performance obligation. 38 of IFRS 15 to determine whether the The entity applies paragraphs 31 – performance obligation (ie the bundle of the licence and the manufacturing ance obligation satisfied at a point in time or over time. services) is a perform The example in the extract above (Example 56, Case A) illustrates the importance of applying the licensing application guidance when determining the nature of an entity’s promise in granting a licence that is combined into a single performance obligation with other promised goods or services. That is because the conclusion of whether a non - distinct licence provides the customer with a right to use intellectual property or a right to access intellectual property may have a significant effect on the timing of revenue recognition for the single combined performance obligation. In Example 56, Case A, the entity needs to determine the nature of its pro mise in granting the licence within the single performance obligation (comprising the licence and the manufacturing service) to appropriately apply the general principle of recognising revenue when (or as) it satisfies its performance obligation to the cus tomer. If the licence in this example provided a right to use the entity’s intellectual property that on its own would be recognised at the point in time in which control of the licence is transferred to the customer, it is likely that the combined perfo rmance obligation would only be fully satisfied at the end of the fifth year, when the manufacturing service is complete. In contrast, if the licence provided a right to access the entity’s intellectual property, the combined performance obligation year licence period and it is - ot be fully satisfied until the end of the 10 would n likely this would extend the period of revenue recognition beyond the date when the manufacturing service is complete. Updated October 2018 312 A closer look at IFRS 15, the revenue recognition standard

313 FASB differences nsiders the nature of its promise ASC 606 explicitly states that an entity co in granting a licence when applying the general revenue recognition model to a single performance obligation that includes a licence and other goods or services (i.e., when applying the general requirements, consistent with 15.31 – 45, to assess whether the performance obligations are those in IFRS satisfied at a point in time or over time). Consequently, when the licence is not the predominant item in a single performance obligation, this may result in a US GAAP preparer considering the nature of its promise in granting 317 a licence in a greater number of circumstances than an IFRS preparer. The determination of whether a licence is the predominant component may es may need to be obvious in some cases, but not in others. Therefore, entiti exercise significant judgement and consider both qualitative and quantitative factors. 8.3 Transfer of control of licensed intellectual property When determining whether a licence of intellectual property transfers to a customer (and revenue is recognised) over time or at a point in time, t he standard states that an entity provides a customer with either: • A right to access the entity’s intellectual property throughout the licence period for which revenue is recognised over the licence period Or • A right to use the entity’s intellectual property as it exists at the point in time the licence is granted for which revenue is recognised at the point in time the customer can first use and benefit from the licensed intellectual property The standard provides the following application guidance on the timing of revenue recognition for right - to - access and right - to - use licences: Extract from IFRS 15 B60. If the criteria in paragraph B58 are met, an entity shall account for the prom ise to grant a licence as a performance obligation satisfied over time because the customer will simultaneously receive and consume the benefit from the entity's performance of providing access to its intellectual property as the performance occurs (see pa ragraph 35(a)). An entity shall apply paragraphs 39 45 to select an appropriate method to measure its progress – towards complete satisfaction of that performance obligation to provide access. B61. If the criteria in paragraph B58 are not met, the nature of an entity's promise is to provide a right to use the entity's intellectual property as that intellectual property exists (in terms of form and functionality) at the point in time at which th e licence is granted to the customer. This means that the customer can direct the use of, and obtain substantially all of the remaining benefits from, the licence at the point in time at which the licence transfers. An entity shall account for the promise to provide a right to use the entity's intellectual property as a performance obligation satisfied at a point in time. An entity shall apply paragraph 38 to determine the point in time at which the 317 IFRS 15.BC414Y. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 313

314 Extract from IFRS 15 (cont’d) licence transfers to the customer. However, revenue cannot be recognised for a licence that provides a right to use the entity's intellectual property before the beginning of the period during which the customer is able to use For example, if a software licence period begins and benefit from the licence. before an entity provides (or otherwise makes available) to the customer a code that enables the customer to immediately use the software, the entity would not recognise revenue before that code has been p rovided (or otherwise made available). 2018) pdated October (u 8.3.1 Right to access The Board concluded that a licence that provides an entity with the right to access intellectual property is satisfied over time “because the customer simultaneously receives and consumes the benefit from the entity’s p erformance as the performance occurs”, including the related activities 318 undertaken by entity. This conclusion is based on the determination that when a licence is subject to change (and the customer is exposed to the positive or negative effects of that change), the customer is not able to fully gain control over the licence of intellectual property at any given point in time, but rather gains control over the licence period. Entities need to apply the general requirements in IFRS 15.39 - 45 to determine the appropriate method (i.e., the use to measure progress (see s ection 7.1.4) in addition to IFRS 15.B61 discussed below in section 8.3.3 . and be nefit requirement) , which is The standard includes the following example of a right to - access licence: - Extract from IFRS 15 Example 58 — Access to intellectual property (IFRS 15.IE297 - IE302) An entity, a creator of comic strips, licenses the use of the images and names of its comic strip characters in three of its comic strips to a customer for a four - year term. There are main characters involved in each of the comic strips. However, newly cr eated characters appear regularly and the images of the characters evolve over time. The customer, an operator of cruise ships, can use the entity’s characters in various ways, such as in shows or parades, within reasonable guidelines. The contract requir es the customer to use the latest images of the characters. In exchange for granting the licence, the entity receives a fixed payment of CU1 million in each year of the four - year term. In accordance with paragraph 27 of IFRS 15, the entity assesses the g oods and services promised to the customer to determine which goods and services are distinct. The entity concludes that it has no other performance obligations other than the promise to grant a licence. That is, the additional activities associated with t he licence do not directly transfer a good or service to the customer because they are part of the entity’s promise to grant a licence. The entity assesses the nature of the entity’s promise to transfer the licence 15. In assessing the criteria the in accordance with paragraph B58 of IFRS entity considers the following: (a) t he customer reasonably expects (arising from the entity’s customary business practices) that the entity will undertake activities that will 318 IFRS 15.BC414. Updated October 2018 314 A closer look at IFRS 15, the revenue recognition standard

315 Extract from IFRS 15 (cont’d) significantly affect the intellectual property to which the customer has rights (ie the characters). This is because the entity’s activities (ie development of the characters) change the form of the intellectual property to which the customer has rights. In addition, the ability of the customer to obtain benefit from the intellectual property to which the customer has rights is substantially derived from, or dependent upon, the entity’s ongoing activities (ie the publishing of the comic strip). t he righ (b) ts granted by the licence directly expose the customer to any positive or negative effects of the entity’s activities because the contract requires the customer to use the latest characters. (c) e ven though the customer may benefit from those activities throu gh the rights granted by the licence, they do not transfer a good or service to the customer as those activities occur. Consequently, the entity concludes that the criteria in paragraph B58 of o transfer IFRS 15 are met and that the nature of the entity’s promise t the licence is to provide the customer with access to the entity’s intellectual property as it exists throughout the licence period. Consequently, the entity accounts for the promised licence as a performance obligation satisfied over time (ie the criterion in paragraph 35(a) of IFRS 15 is met). The entity applies paragraphs 39 – 45 of IFRS 15 to identify the method that best depicts its performance in the licence. Because the contract provides the customer with unlimited use of the licensed char acters for a fixed term, the entity determines that a time - based method would be the most appropriate measure of progress towards complete satisfaction of the performance obligation. Frequently asked questions 2: Question 8 - e that provides a right to access intellectual Is a licenc property a series of distinct goods or services that would be accounted for as a single performance obligation? Step 2 of the model requires an entity to identify the performance obligations whether multiple distinct goods or in a contract. This includes determining services be accounted for as a single performance obligation under would section 4.2.2). It is likely that m the series requirement (see any licences that provide a right to access intellectual property may a series of distinct be goods or services that are substantially the same and have the same pattern of transfer to the customer (e.g., a series of di stinct periods of access to intellectual property, such as monthly access or quarterly access). A TRG agenda paper included an example of a licenc e that provides a right to access intellectual property that is accounted for as a series of distinct goods 319 o In the examp le, a franchisor grants a licenc e of intellectual r services. property to a franchisee allowing the franchisee to use its trade name and sell its product for a period of 10 years. As discussed in Question 4 - 6 in section 4.2.2 , if the nature o f an entity’s promise is to provide a single service 319 TRG Agenda paper no. 39, Application of the Series Provision and Alloca tion of Variable 13 , dated July 2015. Consideration A closer look at IFRS 15, the revenue recognition standard Updated October 2018 315

316 Frequently asked questions (cont’d) the evaluation of whether goods or services are distinct for a period of time, and substantially the same considers whether each time increment of access intellectual property (e.g., hour, day) is distinct and substantially the to the same. In this example, the nature of the franchisor’s promise is to provide a right to access the intellectual property throughout the licence period. Each time increment is distinct because the customer benefits from the right to on its own (i.e., each time increment is capable of being access each day distinct). In addition, each day is separately identifiable (i.e., each time cause: there is no increment is distinct in the context of the contract) be integration service provided between the days of access provided; no day modifies or customises another; and the days of access are not highly interdependent or highly interrelated. In addition, each distinct daily service is substantial ly the same because the customer receives access to the intellectual property each day. If a licence meets the criteria to be accounted for as a series of distinct goods or services, an entity needs to consider whether any variable consideration ntract (e.g., royalties, milestone payments) should be allocated in the co to the distinct periods of access, if certain allocation criteria are met. See section 6.3 for a discussion of the variable consideration allocation exception and section 8.5 for a discussi on of the accounting for sales - based or usage - based royalties. 8.3.2 Right to use In contrast, when the licence represents a right to use the intellectual property as it exists at a specific point in time, the customer gains control over that property at the beginning of the period for which it has the right to intellectual use the intellectual property. This timing may differ from when the licence was granted. For example, an entity may provide a customer with the right to use intellectual property, but i ndicate that right to use does not start until 30 days after the agreement is finalised. For the purpose of determining when control - to - use licence, the Board was clear that the assessment is transfers for the right from the customer’s perspective (i.e., w hen the customer can use the licensed intellectual property), rather than the entity’s perspective (i.e., when the entity transfers the licence). Entities need to apply the general requirements in time that control of t IFRS 15.38 to determine the point in he licenc e transfers to the customer (see section 7.2) in addition to IFRS 15.B61 (i.e., the use and . iscussed below in section 8.3.3 d which is benefit requirement) , Updated October 2018 316 A closer look at IFRS 15, the revenue recognition standard

317 The standard includes the following example of a right to - use licence: - Extract from IFRS 15 Example 59 — Right to use intellectual property (IFRS 15.IE303 - IE306) An entity, a music record label, licenses to a customer a 1975 recording of a classical symphony by a noted orchestra. The customer, a consumer products company, has the right to use the recorded symphony in all commercials, including television, radio and online advertisements for two years in A. In exchange for providing the licence, the entity receives fixed Country consideration of CU10,000 per month. The contract does not include any other goods or services to be provided by the entity. The contract is non - cancellable. The entity assesses the goods and services promised to the customer to determine which goods and services are distinct in accordance with paragraph 27 of IFRS 15. The entity concludes that its only performance obligation is to grant the licence. The entity determines that the term of the licence (two years), its geographical scope (the customer’s right to use the recording only in Country A), and the defined permi tted use for the recording (in commercials) are all attributes of the promised licence in the contract. In accordance with paragraph B58 of IFRS 15, the entity assesses the nature of the entity’s promise to grant the licence. The entity does not have any contractual or implied obligations to change the licensed recording. The licensed recording has significant stand - alone functionality (ie the ability to be played) and, therefore, the ability of the customer to obtain the benefits of the recording is not substantially derived from the entity’s ongoing activities. The entity therefore determines that the contract does not require, and the customer does not reasonably expect, the entity to undertake activities that significantly affect the licensed recor ding (ie the criterion in paragraph B58(a) is not met). Consequently, the entity concludes that the nature of its promise in transferring the licence is to provide the customer with a right to use the entity’s intellectual property as it exists at the poi nt in time that it is granted. Therefore, the promise to grant the licence is a performance obligation satisfied at a point in time. The entity recognises all of the revenue at the point in time when the customer can direct the use of, and obtain substa ntially all of the remaining benefits from, the licensed intellectual property. Because of the length of time between the entity’s performance (at the beginning of the period) and the customer’s monthly payments over two - the entity considers the requirements in cancellable), years (which are non 65 of IFRS 15 to determine whether a significant financing – paragraphs 60 component exists. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 317

318 8.3.3 Use and benefit requirement - - use licence cannot be recognised IFRS 15 states that revenue from a right to before the beginning of the period during which “the customer is able to 320 use and benefit from the licence”. The IASB explained in the Basis for Conclusions that if the customer cannot use and benefit from the licensed 321 intellectual property then, by definition, it does not control the licence. See s ection 8.4 for discussion on licence renewals. Consider an example where an entity provides a customer with a right to use its softw are, but the customer requires a code before the software will function, which the entity will not provide until 30 days after the agreement is finalised. In this example, it is likely that the entity would conclude that control of the licence does not tr ansfer until 30 days after the agreement is finalised because that is when the customer has the right to use and can benefit from the software. 8.4 Licence renewals As discussed in ection 8.3.3 above, IFRS 15 states that revenue cannot be s recognised for a licence that provides a right to use the entity’s intellectual property before the beginning of the period during which the customer is able 322 to use and benefit from the licence. S ome stakeholders questioned whether IFRS 15.B61 applies to the renewal of an existing licence or whether the entity could recognise revenue for the renewal when the parties agree to the renewal. Therefore, TRG discussed the application of IFRS 15.B61 withi n the context 323 of renewals or extensions of existing licences. The discussion at the TRG indicated that this is an area in which judgement is needed and, therefore, this 324 topic was further discussed by the IASB. t the application of the contract The IASB decided that a clarification abou modification requirements specifically for renewals of licensing arrangements was not necessary. The Board noted that, although some diversity may arise, IFRS han 15 provides a more extensive framework for applying judgement t IAS 18. In addition, in making its decision, the Board also considered the wider implications of amending IFRS 15 before its effective date. Therefore, when an entity and a customer enter into a contract to renew (or icence, the entity needs to evaluate whether extend the period of) an existing l the renewal or extension should be treated as a new licence or as a modification of the existing contract. A modification would be accounted for in accordance 325 15.18 – 21. with the contract modifications requirements in IFRS 320 IFRS 15.B61. 321 IFRS 15.BC414. 322 IFRS 15.B61. 323 IFRS 15.BC414S. 324 Issues About Restrictions and TRG Agenda paper no. 45, Licences – Specific Application 9 November 2015. , dated Renewals 325 IFRS 15.BC414T. Updated October 2018 318 A closer look at IFRS 15, the revenue recognition standard

319 FASB differences Under ASC 606, revenue related to the renewal of a licence of intellectual property may not be recognised earlier than the beginning of the renewal the case even if the entity provides a copy of the intellectual period. This is property in advance or the customer has a copy of the intellectual property from another transaction. The FASB also provided an additional example to illustrate this point. IFRS 15 does not include similar requirements. Therefore, the IASB noted IFRS entities in the Basis for Conclusions that recognise revenue for might 326 GAAP entities . contract renewals or extensions earlier than US 8.5 Sales - based or usage - based royalties on licences of in tellectual property (updated October 2018) The standard provides application guidance on the recognition of revenue - - based royalties on licences of intellectual property, for sales based or usage which differs from the requirements that apply to other reve . nue from licences IFRS 15 requires that royalties received in exchange for licences of intellectual property are recognised at the later of when: (a) The subsequent sale or usage occurs. And (b) The performance obligation to which some or all of the sales - based or usage - based royalty has been allocated is satisfied (or partially satisfied). That is, an entity recognises the royalties as revenue for such arrangements when (or as) the customer’s subsequent sales or usage occurs, unless that pattern of recognition accelerates revenue recognition ahead of the entity’s satisfaction of the performa nce obligation to which the royalty solely or partially 327 s relates, based on an appropriate measure of progress (see ection 7.1.4). The Board explained in the Basis for Conclusions that for a licence of intellectual property for which the consideration is subsequent based on the customer’s sales or usage, an entity does not recognise any revenue for the variable amounts until the uncertainty is resolved (i.e., when a customer’s subsequent 328 sales or usage occurs). The IASB also explained in the Basis for Con clusions that the application guidance in IFRS 15.B63 - B63B addresses the based or of sales - recognition usage - based royalties received in exchange for a licence of intellectual property, rather than when such amounts are included in the transaction price of the 329 contract. As a result, this exception is a recognition constraint and the constraint on variable consideration (see s ection 5.2.3) does not apply. royalty recognition constraint because both users The Board said it added the and preparers of financia l statements indicated that it would not be useful for - entities to recognise a minimum amount of revenue for sales - based or usage based royalties received in exchange for licences of intellectual property (following the requirements in the general model on estimating the transaction price) because that approach would inevitably require the entity to report significant adjustments to the amount of revenue recognised throughout the life ted to the of the contract as a result of changes in circumstances that are not rela 326 IFRS 15.BC414U. 327 IFRS 15.BC421I. 328 IFRS 15.BC219. 329 IFRS 15.BC421I. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 319

320 entity’s performance. The Board observed that this would not result in relevant information, especially for contracts in which the sales based or usage - based - 330 royalties are paid over a long period of time. based or usa In some contracts, a sales - based r oyalty may be related to both - ge licenc e of intellectual property and another good or service th at may , or may a not , be distinct. IFRS 15.B63A requires that the royalty recognition constraint r predominant item to be applied to the overall royalty stream when the sole o which the royalty relates is a licence of intellectual property (including when no single licence is the predominant item to which the of intellectual property ro yalty relates, but the royalty predominantly relates to two or more licences 331 in the contract). That is, of intellectual property this application guidance is applicable to all licences of intellectual property, regardless of whether they have been deter mined to be distinct. The standard does not provide a bright line for determining the ‘predominant’ item in a contract that includes a licence of intellectual property. The Board acknowledged in the Basis for Conclusion s be that significant judgement may required to determine when a licence is the predominant item to which a royalty relates. However, the judgement for determining whether a licence is the predominant item is likely to be less than the judgement needed to apply the general requirements fo r variable 332 consideration to such contracts. applies e application guidance in IFRS 15. B63 - B63B It is important to note that th only to licences of intellectual property for which some or all of the consideration based or usage - is in the form of a sales - in the ba sed royalty. The Board said Basis for Conclusions that the royalty recognition constraint was structured to e of transaction (i.e., a licenc e of intellectual apply only to a particular typ . Therefore , other transactions that may be economically similar would property) 333 be accounted for differently. Th at is , entities cannot analogise to th e royalty recognition constraint for other types of transactions . For example, i t cannot be applied if - ba sed or usage - consideration in a contract is in the form of a sales based royalty, but there is no licence of intellectual property (e.g., the sale of a tangible good that includes a significant amount of intellectual property) . W hen the the royalty recognition constraint cannot be applied, an entity follow s r equirements in the general model on estimating variable consideration and ection 5.2). In some applying the constraint on variable consideration (see s as to whether the cases, it may not be obvious rrangement is an in - substance a sale of intellectual proper ty ( i.e., a promise that is in the form of a licence, but, in substance, has the characteristics of a sale) or a licence of intellectual property. In such instances, entities would have to exercise judgement to determine ying intellectual property has been whether the control over the underl transferred from the entity to the customer and therefore, has been sold. 330 IFRS 15.BC415. 331 IFRS 15.BC421G. 332 IFRS 15.BC421E. 333 IFRS 15.BC416. Updated October 2018 320 A closer look at IFRS 15, the revenue recognition standard

321 an entity’s following flow chart illustrates The evaluation when determining whether the royalty recognition constraint should be applied to a royalty stream: Does the consideration in the contract include a sales based or - - usage based royalty? No Yes Royalty recognition constraint application guidance not does apply. Royalty recognition constraint apply. application guidance does not - based - based or usage Is the sales No The variable consideration royalty promised in exchange for a 15.50 59 must - requirements in IFRS licence of intellectual property? applied (see section 5.2 above). be Yes No Is the licence of intellectual prop Is the licence of intellectual property erty No - which the sales to the only item the predominant item to which the sales - based or usage based royalty - - based or usage based royalty relates?* relates? Yes Yes Royalty recognition constraint Royalty recognition constraint application guidance applies. application guidance applies. * ations in which no single licenc e is the predominant item to which the sales - This includes situ but the sales based based royalty relates , - - based or usage - based royalty predominant ly or usage relates to two or more licenc es in the contract. The standard provides the following example of a contract that includes two uding a licence that provides a right to use the performance obligations, incl entity's intellectual property and consideration in the form of sales - based royalties. In the example, the licence is determined to be the predominant item to which the royalty relates: Extract from IFRS 15 Example 60 based royalty for a licence of intellectual property - Sales — 15.IE307 - IE308) (IFRS An entity, a movie distribution company, licenses Movie XYZ to a customer. The customer, an operator of cinemas, has the right to show the movie in its cinemas for six weeks. Additionally, the entity has agreed to (a) provide memorabilia from the filming to the customer for display at the customer's - week screening period; and cinemas before the beginning of the six (b) sponsor radio advertisements for Movie XYZ on popular radio stations in the customer's geographical area throughout the six - week screening period. In exchange for providing the licence and the additional promotional goods s and services, the entity will receive a portion of the operator's ticket sale - based royalty). for Movie XYZ (ie variable consideration in the form of a sales A closer look at IFRS 15, the revenue recognition standard Updated October 2018 321

322 Extract from IFRS 15 (cont’d) The entity concludes that the licence to show Movie XYZ is the predominant - item to which the sales based royalty relates because the entity has a reasonable expectation that the customer would ascribe significantly more value to the licence than to the r elated promotional goods or services. The entity recognises revenue from the sales - based royalty, the only consideration to which the entity is entitled under the contract, wholly in accordance with paragraph B63. If the licence, the memorabilia and advertising activities are separate performance obligations, the entity the would allocate the sales - based royalty to each performance obligation. As illustrated in the extract above (Example 60), IFRS 15.B63B requires that, royalty recognition const raint is applied, the royalty stream must when the royalty recognition constraint or be accounted for either entirely under the entirely under the general variable consideration constraint requirements (see ection 5.2.3). That is, an entity would not split a single royalty and apply the s to a portion of the sales royalty recognition constraint based royalty and the - general constraint requirements for variable consideration to the remainder. The Board indicated in the Basis for Conclusions that it would be more complex to account for part of a royalty under the royalty recognition constraint and another part under the general requirements for variable consideration and that doing so would not provide any additional us eful information to users of financial statements. This is because splitting a royalty would result in an entity recognising an amount at contract inception that would reflect neither the amount to which the entity expects to be entitled, based on its perf ormance, nor the amount to which the entity has become legally entitled during the 334 period. Regardless of whether an entity applies the royalty recognition constraint or the general requirements for variable consideration, it is still required to based royalties to separate performance allocat - based or usage e sales - obligations in a contract (as noted in Example 60 above). In order to perform may need to include expected royalties in such an allocation, an entity its estimate of the stand - alone selling pri ce of one or more of the performance obligations . Example 35 from the standard (extracted in full in s ection 6.3) also illustrates the allocation of the transaction price (including sales based or - usage - based royalties) to the performance obligations in t he contract . 8.5.1 Recognition of royalties for a licence that provides a right to access intellectual property The IASB explained in the Basis for Conclusions that the royalty recognition constraint is intended to align the recognition of sales or usage - b ased royalties with the standard’s key principle that revenue should be recognised when (or as) an entity satisfies a performance obligation. As discussed above, IFRS 15 requires that royalties received in exchange for licences of intellectual property e recognised at the later of when: (1) the subsequent sales or usage occurs; ar - based or usage and (2) the performance obligation to which the sales based - royalties relates has been satisfied (or partially satisfied). That is, an entity recognises the royalti es as revenue when (or as) the customer’s subsequent sales or usage occurs, unless that pattern of recognition accelerates revenue recognition ahead of the entity’s satisfaction of the performance obligation to which the royalty solely or partially relates on an appropriate measure , based 335 s ection 7.1.4). of progress (see 334 IFRS 15.BC421J. 335 IFRS 15.BC421I. Updated October 2018 322 A closer look at IFRS 15, the revenue recognition standard

323 Consider the following example, which was provided by the FASB, that illustrates when revenue recognition may be inappropriately accelerated ahead as recognised under IFRS 15.B63(a) for of an entity’s performance, if revenue w 336 - access licence: - a right to l icensing contract with a declining royalty rate Example of a A contract provides a customer with the right to access an entity’s intellectual property and the entity receives royalties of 8% on total sales up million, 4% on the next CU3 million in sales and 2% on all sales above to CU1 CU4 million. The declining roy alty rate does not reflect changing value to the customer. In this example, the FASB noted that recognising royalties as they are due (i.e., according to the contractual formula) would not be aligned with the principle of recognising revenue only when ( or as) an entity satisfies a performance obligation because the right to access the intellectual property is provided evenly over the licence term while the declining royalty rate does not reflect the value to the customer. However, the FASB stated that t existence of a declining royalty rate in a contract does not always mean he - based or usage that recognising revenue for sales based royalties as the - customer’s underlying sales or usage occur is inappropriate. In fact, it would be appropriate if the declin ing royalty rate reflects the changing value to the customer. The above example notwithstanding, for many contracts with licences that royalty provide a right to access an entity’s intellectual property, applying the recognition constraint result based in an e ntity recognising revenue from sales - s or usage - based royalties when (or as) the customer’s underlying sales or based measure usage occurs in accordance with IFRS 15.B63(a). An output - of the practical progress that is the same as, or similar to, the application of 15.B16 (i.e., when the right to consideration corresponds expedient in IFRS directly with the value to the customer of the entity’s performance to date) is appropriate because the entity’s right to consideration (i.e., the sales - based - or us based royalties earned) often correspond s directly with the value age to the customer of the entity’s performance completed to date. The practical expedient in IFRS 15.B16 is discussed further in s ection 7.1.4. In addition, an output - based measure could a lso be appropriate for a licence that provides a right to access intellectual property in which the consideration is in the form of a fixed fee and royalties. The following example from the standard illustrates this: Extract from IFRS 15 — Access to intellectual property (IFRS 15.IE309 - Example 61 IE313) An entity, a well - known sports team, licenses the use of its name and logo to a customer. The customer, an apparel designer, has the right to use the sports team's name and logo on items including t sh irts, caps, mugs and - towels for one year. In exchange for providing the licence, the entity will receive fixed consideration of CU2 million and a royalty of five per cent of the sales price of any items using the team name or logo. The customer expects tha t the entity will continue to play games and p rovide a competitive team. 336 Revenue from Contracts with Customers (Topic 606): Identifying 10, ASU 2016 - , April 2016, Performance Obligations and Licensing paragraph BC71. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 323

324 Extract from IFRS 15 (cont’d) The entity assesses the goods and services promised to the customer to determine which goods and services are distinct in accordance with paragraph 27 of IFRS 15. The entity concludes that its only performance obligation is to transfer the licence. The additional activities associated with the licence (ie continuing to play games and provide a competitive team) do not directly transfer a good or service to the customer because they are part of the entity's promise to grant the licence. The entity assesses the nature of the entity's promise to transfer the licence in accordance with paragraph B58 of IFRS 15. In assessing the criteria the entity considers the following: (a) t he entity concludes that the customer would reasonably expect that the entity will undertake activities that will significantly affect the intellectual property (ie the team name and logo) to which the customer has rights. This is on the basis of the entity's customary business practice to undertake activities that support and maintain the value of the name and logo such as continuing to play and providing a competitive team. The entity determines that the ability of the customer to obtain benefit from the name and logo is substantially derived from, or dependent upon, the expected activities of the entity. In addition, the entity observes that because some of its consideration is dependent on the success of the based royalty), the entity has a shared - customer (through the sales economic interest with the customer, which indicates that the customer will expect the entity to undertake those activities to maximise earnings. t he entity observes that the rights granted by the licence (ie the use of (b) the team's name and logo) directly expose the customer to any positive or negative effects of the entity's activities. (c) t he entity also observes that even though the customer may benefit ey do from the activities through the rights granted by the licence, th not transfer a good or service to the customer as those activities occur. The entity concludes that the criteria in paragraph B58 of IFRS 15 are met and the nature of the entity's promise to grant the licence is to provide the customer with access to the entity's intellectual property as it exists throughout the licence period. Consequently, the entity accounts for the promised licence as a performance obligation satisfied over time (ie the criterion in paragraph 35(a) of IFRS 15 is met). The entity then applies paragraphs 39 – 45 of IFRS 15 to determine a measure of progress that will depict the entity's performance. For the consideration that is in the form of a sales based royalty, paragraph B63 of IFRS 15 applies - - based royalty rel because the sales ates solely to the licence, which is the only performance obligation in the contract. The entity concludes that recognition of the CU2 million fixed consideration as revenue rateably over time plus recognition of the royalty as revenue as and when the cust omer's sales of items using the team name or logo occur reasonably depicts the entity's progress towards complete satisfaction of the licence performance obligation. Updated October 2018 324 A closer look at IFRS 15, the revenue recognition standard

325 In Example 61 above, the fixed consideration of CU2 million is an explicit term ontract with the customer. In some contracts, fixed consideration may in the c be implied, such as when a guaranteed minimum amount of royalties is part of the transaction price. Question 8 - 2 in section 8.3.1 , many licences that In addition, as discussed in provide a right to access intellectual property may constitute a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer (e.g., a series of distinct periods of access to intellectual proper ty, such as monthly access or quarterly access). In cases a performance obligation to be accounted for as a series where the criteria for s to consider of distinct goods or services have been met, an entity need - tract (e.g., sales based or usage whether any variable consideration in the con - based royalties) should be allocated directly to the distinct periods of access, if the criteria for certain allocation exceptions are met. The allocation of sales - in the - sult s based or usage based royalties in this manner generally re recognition of royalties as revenue when (or as) the customer’s underlying sales or usage occurs. An entity may need to apply significant judgement to determine the appropriate pattern of revenue recognition for royalties received on a licence that provides a right to access intellectual property. Frequently asked questions Question 8 - 3 : Can the recognition constraint for sales - based or usage - based royalties be applied to royalties that are paid in consideration for l property (rather than just licences of intellectual sales of intellectua property)? No. As noted in the Basis for Conclusions, the Board discussed but decided royalty recognition constraint to include sales not to expand the scope of the also stated that the royalty recognition of intellectual property. The Board is intended to apply only to limited circumstances (i.e., those constraint circumstances involving licences of intellectual property) and, therefore, 337 s. entities cannot apply it by analogy to other types of transaction Question 8 4 : If a contract for a licence of intellectual property includes - payments with fixed amounts (e.g., milestone payments) that are determined by reference to sales - based or usage - based thresholds, would the royalty recognition constraint need to be applied? would apply to Yes W e generally believe the royalty recognition constraint . fixed amounts of variable consideration (i.e., fixed amounts of consideration that are contingent on the occurrence of a future event), such as milestone payments, provided the amounts are determined by reference to sales - based or usage - bas ed thresholds. This is the case even if those payments are not referred to as ‘royalties’ under the terms of the contract. However, entities need to apply judgement and carefully evaluate the facts and circumstances of their contracts for licences of intel lectual property to determine whether these types of payments should be accounted f or using the royalty recognition constraint . 337 IFRS 15.BC421, BC421F. A closer look at IFRS 15, the revenue recognition standard Updated October 2018 325

326 Frequently asked questions (cont’d) Consider the following example: constraint – Application of the Illustration 8 - to 1 royalty recognition a milestone payment n entity enters into a contract to grant a customer a right to use the A ’s licence. The contract contains payment terms that include a CU10 entity million milestone payment that is payable to the entity once the customer has achieved sales of CU100 million. entity The determines that the milestone payment is based on the customer’s subsequent sales and represents variable consideration because it is contingent on the customer’s sales reaching CU100 million. entity The counts for the CU10 million milestone payment in accordance ac with the royalty recognition constraint and only recognises revenue for the milestone payment once the customer’s sales reach CU100 million. Question 8 - 5 : Can an entity recognise revenue for sale s - based or usage - based royalties for licences of intellectual property on a lag if actual sales or usage data is not available at the end of a reporting period? The standard requires that sales - based or usage - based royalties promised in exchange for licences of intellectual property be recognised as revenue at the later of when: (1) the subsequent sales or usage occurs and (2) the performance obligation to which the sales - based or usage - based royalties after the relates has been satisfied (or p artially satisfied). Therefore, con application guidance traint conditions in the royalty recognition s have been met (i.e., the underlying sales or usage has occurred and the (or performance obligation to which the royalties relate has been satisfied partially satisfied), we believe that licensors without actual sales or usage data from the licensee need to make an estimate of royalties earned in the current reporting period. This may result in a change in practice for entities that have previousl y recognised revenue from royalties on a lag (i.e., in a reporting period subsequent to when the underlying sales or usage occurs). Question 8 - 6 : How does a minimum guarantee affect the recognition of exchange for a licenc sales based or usage - based royalties p romised in - e of intellectual property that is satisfied at a point in time ? [FASB TRG meeting 7 November 2016 - Agenda paper no. 58 ] FASB TRG members generally agreed that a minimum guaranteed amount based or usage of sales based royalties promised in exchange for a li cence - of intellectual property that is satisfied at a point in time (IFRS: right - to - u se licence; US GAAP: licence of ) would need functional intellectual property to be recognised as re venue at the point in time that the entit y transfers control of the licence to the customer (see section 8.3.2) . Any royaltie s above the fixed minimum would be recognised in accordance with the royalty later of when the r recognition constraint (i.e., at the sale or usage occurs o performance obligation to which some or all satisfies the when the entity of the royalty has been allocated). Updated October 2018 326 A closer look at IFRS 15, the revenue recognition standard

327 Frequently asked questions (cont’d) 7 - How does a minimum guarantee affect the recognition of : Question 8 exchange for a licenc based based royalties p romised in or usage e - sales - that is satisfied ove r time of intellectual property [FASB TRG meeting ? - Agenda paper no. 5 8 ] 7 November 2016 FASB TRG members generally agreed that various recognition approaches could be acceptable for minimum guarantees promise d in exchange for licences of intellectual property that are satisfied over time (IFRS: right - to - symbolic intellectual property , see access licences; US GAAP: licences of 3.1 section 8. ). This is because, as the FASB staff noted in the TRG agenda paper, this question is asking what is an appropriate measure of progress for such contracts and the standard permits reasonable judgement when dard does not prescribe selecting a measure of progress. Because the stan a single approach that must be applied in all circumstances in which a sales - or usage - based based royalty is promised in exchange for a licence of intellectual property and the contract includes a minimum guaranteed amount, an enti ty should consider the nature of its arrangements and make sure that the measure of progress it selects does not override the core principle of the standard that “an entity shall recognise revenue to ustomers in an amount depict the transfer of promised goods or services to c that reflects the consideration to which the entity expects to be entitled in 338 exchange for those goods or services . An entity would need to disclose ” it is likely that this would affect the the accounting policy it selects because mount and timing of revenue recognised. a agenda paper describes two approaches. Under one approach, an entity The would estimate the total consideration (i.e., the fixed minimum and the variable consideration from future royalties) and apply an appropriate measure of progress to recognise revenue as the entity satisfies the recognition constraint. performance obligation, subject to the royalty apply a measure Alternatively, under the other approach, an entity could begin recognising of progress to the fixed consideration and the variable component after exceeding the fixed amount on a cumulative basis. The first approach can be applied in two different ways, as follows: • View A: If an entity expects royalties to exceed the minimum guarantee, determine that an output based measure is an the entity may - progress and apply the right - to - invoice appropriate measure of practical expedient (i.e., IFRS 15.B16 , see section 7.1.4. A ) because the royalties due for each period correlate directly with the value to the cu stomer of the entity’s performance each period. As a result of appl ying the practical expedient for recognising revenue, the entity would not need to estimate the expected royalties beyond determining whether it will , at contract inception , that expects alties exceed the minimum the roy guarantee. However, the entity would be required to update that assessment at the end of each reporting period. It is important to note that this view is likely to be appropriate if the entity expects cumulative royalties to exceed the minimum guarantee. • View B: An entity estimates the transaction price for the performance obligation (including both fixed and variable consideration) and recognises revenue using an appropriate measure of progress, subject to the royalty recog nition constraint. If an entity does not expect cumulative royalties to exceed the minimum guarantee, the measure of progress is applied to the minimum guarantee since the transaction price will at least equal the fixed amount. 338 . IFRS 15.2 A closer look at IFRS 15, the revenue recognition standard Updated October 2018 327

328 Frequently asked questions (cont’d) The second approach can be summarised, as follows: • View C: An entity recognises the minimum guarantee (i.e., the fixed consideration) using an appropriate measure of progress and recognises royalties only when cumulativ e royalties exceed the minimum guarantee. The FASB staff noted in the TRG agenda paper that, in order for an entity - time licence would have to be considered a series to apply View C, the over of distinct goods or services (i.e., a series of distinct time periods) and the variable consideration (i.e., the royalties in excess of the minimum guarantee) would have to be allocated to the distinct time periods to which they relate. To illustrate the application of these views, the following example has been adapted from one included in the FASB TRG agenda paper: that is Example of accounting for a licence of intellectual property in exchange for a minimum guarantee and sales - satisfied over time based royalty An entity enters into a five - year arrangement to licence a trademark. The trademark is determined to be a licence of intellectual property that (IFRS: right to - access li cence; US GAAP: licence of is satisfied over time - . The licence requires the customer to pay a symbolic intellectual property) sales - based royalty of 5% of its gross sales associated with the trademark. However, the contract includes a guarantee that the entity will receive a mi nimum of CU5 million for the entire five - year period. The customer’s actual gross sales associated with the trademark and the related royalties each year are, as follows (this information is not known at the beginning of the contract): – CU15 milli on (royalties equal CU750,000) Year 1 Year 2 – CU30 million (royalties equal CU1.5 million) CU40 million (royalties equal CU2 million) – Year 3 Year 4 – CU20 million (royalties equal CU1 million) – CU60 million (royalties equal CU3 million) Year 5 Total royalties equal CU8.25 million. The entity expects total royalties to exceed the minimum View A: guarantee. The entity determines that an output - based measure is an appropriate measure of progress and applies the right to - invoice - practical expedient because the ro yalties due for each period correlate directly with the value to the customer of the entity’s performance for each period. The entity recognises revenue from the sales - based royalty when the customer’s subsequent sales occur. (in 000s) Year 1 Year 2 Year 3 Year 4 Year 5 Royalties received 1,500 2,000 750 1,000 3,000 750 1,500 2,000 1,000 3,000 Annual revenue 4,250 5,250 8,250 Cumulative revenue 750 2,250 Updated October 2018 328 A closer look at IFRS 15, the revenue recognition standard

329 Frequently asked questions (cont’d) property that is Example of accounting for a licence of intellectual in exchange satisfied over time - for a minimum guarantee and sales (cont’d) based royalty The entity estimates the transaction price (including fixed and View B: variable consideration) for the contract. The entity determines that time psed is an appropriate measure of progress and recognises revenue ela rat e ably over the five - year term of the contract, subject to the royalty cumulative revenue recognised cannot exceed recognition constraint (i.e., once the minimum guarantee has been the cumulative royalties received met ). Year 1 Year 5 (in 000s) Year 4 Year 3 Year 2 750 Royalties received 1,500 2,000 1,000 3,000 8,250 5,250 750 2,250 Royalties (cumulative) 4,250 1,650 1,650 1,650 Fixed + Variable 1,650 1,650 a (rateable) 3,000 1,650 1,650 300 Annual r evenue 1,650 b Cumulative revenue 5,250 4,950 8,250 3,300 1,650 including both Assuming the entity’s estimated transaction price ( fixed and variable a . consideration) is CU8.25 million, the annual revenue that could be recognised is million (CU8.25 million divided by five years , being contract term). CU1.65 In Year 4, the cumulative revenue using a time - b . elapsed measure of progress of CU6.6 million (CU4.95 million plus CU1.65 million) exceeds the cumulative royalties recei