IFRS Accounting Considerations of the COVID-19 Related to Revenue Recognition
Uncertainties related to the coronavirus pandemic and current market conditions could also prompt entities to modify customer contracts. Customers and entities may also be more likely to terminate contracts (either entirely or partially), which is also a contract modification under IFRS 15. A contract modification occurs when the parties agree to amend the scope or price (or both) of a contract, and the amendments either create new or change existing, enforceable rights and obligations of the parties. An entity accounts for the modification under the requirements in paragraphs 18-21 of IFRS 15. Under these requirements, certain modifications are treated as separate stand-alone contracts, while others are combined with the original contract and accounted for as one contract. In addition, some modifications are accounted for prospectively, while others are accounted for on a cumulative catch-up basis.
It is generally clear when a contract modification has taken place, but in some circumstances, that determination requires judgment. For example, an entity must account for a contract modification before the parties reach a final agreement if the negotiations create enforceable rights and obligations. In addition, contract modifications may be implied by customary business practices as long as they create new or change existing enforceable rights and obligations in the contract. Entities must also determine whether a new contract with an existing customer is a modification of an existing contract. We believe that when entities make this determination, they should consider the facts, circumstances, and factors included in the contract combination requirements in paragraph 17 of IFRS 15.
When an IFRS 15 contract is modified, we believe this may indicate that “a significant change in facts and circumstances” has occurred (see paragraph 13 of IFRS 15) and that the entity needs to reassess the criteria in paragraph 9 of IFRS 15 for the modified contract as well as the contract’s duration (i.e., the period in which parties to the contract have present enforceable rights and obligations). The accounting for any reassessment is prospective, and the reassessment would not change the conclusions associated with goods and services already transferred. That is, an entity would not reverse any receivables, revenue, or contract assets already recognized under the contract because of the reassessment.
Sources:
- Google Image. (2022).
- Ernest & Young. (2021). Applying IFRS IFRS accounting considerations of the Coronavirus pandemic.
- IFRS. (2022). IFRS 15 Revenue from Contracts with Customers. https://www.ifrs.org/issued-standards/list-of-standards/ifrs-15-revenue-from-contracts-with-customers/