TFRS 15, ‘Revenue from contracts with customers’

A new Thai Financial Reporting Standard, TFRS 15, ‘Revenue from contracts with customers’, has been issued and will be applied to accounting periods beginning on or after 1 January 2019 (early adoption is permitted).

Keywords: Mazars, Thailand, Accounting, TFRS 15, IFRS 15

18 October 2018

Mazars has already published two publications relating to IFRS equivalent standard, IFRS 15:

This standard provides accounting requirements for all revenue arising from contracts with customers. It affects all entities that enter into contracts to provide goods or services to their customers, unless the contracts are within the scope of other TFRS requirements, such as revenue recognition for leases, financial instruments, or financial guarantee contracts.

The standard describes the principles that an entity must apply to measure and recognize revenue and the related cash flows. The core principle is that an entity will recognize revenue at the amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring the goods or services to customers.

The principles in TFRS 15 are applied using the following five steps:

1.   Identifying the contract with the customer

2.   Identifying the performance obligations in the contract

3.   Determining the transaction price

4.  Allocating the transaction price to the performance obligations in the contract

5. Recognizing revenue when (or as) the entity meets a performance obligation

As a result, the entities will need to exercise judgment when considering the terms of the contract and all of the facts and circumstances, including implied contract terms. This standard will have a significant effect on many businesses across a variety of industry sectors, such as technology, telecommunication, retail, wholesale and distribution, software development, and intellectual property.

Example:

1. Entity A has entered into an agreement with Entity B to sell machinery together with maintenance services for a five-year period. The total value of the contract is THB 1.5 million. The maintenance services are an obligation to be performed separately.

The standard price of the machinery is THB 1.5 million and the fees for maintenance services for five years are THB 0.5 million. These fees do not include interest.

Based on the principles set out in TFRS 15, allocation of the transaction price for the performance obligations in the contract is as follows:

The performance obligations in the contract Standard selling price (in Thai baht) Allocation of the transaction price for the performance obligations (in Thai baht) Calculation (in Thai baht)
Price of machinery 1,500,000 1,125,000 (1,500,000 / 2,000,000) x 1,500,000
Maintenance service fees 500,000 375,000 (500,000 / 2,000,000) x 1,500,000
Total 2,000,000 1,500,000  

The accounting for this transaction should be recorded as follows:

Debit (in Thai baht) Credit (in Thai baht)
Cash at bank or accounts receivable – trade 1,125,000
Revenue from sales 1,125,000
Recognition of revenue from the sale of machinery when Entity A has transferred the machinery to Entity B
Cash at bank or accounts receivable – trade 75,000
Revenue from maintenance services 75,000
Recognition of revenue from maintenance services based on the straight-line method (375,000/5 years)

First-time application of TFRS 15

With regards to the transition, TFRS 15 provides guidelines on choosing between two methods of applying the new standard as follows:

1. Retroactively to each prior period presented (“full retroactive method”) applying TAS 8, “Accounting Policies, Changes in Accounting Estimates and Errors”.

As a result, for the financial statements for 2019, the company would revise its 2017 and 2018 financial statements to reflect the new standard, and record the cumulative effect of the change recognized in opening retained earnings as of 1 January 2018.

However, the standard provides a number of options, including the following:

a. For a completed contract – the entities are not required to restate any contracts that began and were completed within the same annual reporting period.

b. For a completed contract with a variable consideration – an entity may use the transaction price at the date that the contract was completed rather than an estimated variable consideration in the comparative reporting period.

c. For all periods presented before the date of initial application, an entity need not disclose the transaction price allocated to remaining performance obligations or explain when the entity expects to recognize the amount as revenue.

2.   Retroactively, with the cumulative effect of initially applying the new standard at the date of adoption (“modified retroactive method”).

Therefore, for the financial statements for 2019, the company would not revise its 2017 or 2018 financial statements, but would record the cumulative effect of the change recognized in opening retained earnings as of 1 January 2019.

For more information, please visit the FAP website and IASPlus website.  

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