IASB Request for Information: Post-implementation Review of IFRS 15 Revenue from Contracts with Customers

Page 1 of 9Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)

26 October 2023Dr Andreas BarckowInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Andreas,IASB Request for InformationPost-implementation Review of IFRS 15 Revenue from Contracts with CustomersThe Hong Kong Institute of Certified Public Accountants (HKICPA) is the only bodyauthorised by law to set and promulgate standards relating to financial reporting, auditing,ethics and sustainability disclosures for professional accountants in Hong Kong. We aregrateful for the opportunity to provide our comments on this Request for Information(RFI).Overall, we consider that IFRS 15 has achieved its objectives. It provides a logical modelfor applying accounting principles to transactions and assists entities in determiningaccounting treatments in a comprehensive and systematic manner. Nevertheless, wehave identified application issues relating to certain aspects of the requirements thatwarrant the IASB’s further consideration. We provide detailed comments in the Appendix,and summarize our primary comments and recommendations below.Principal versus agent assessmentOur respondents noted that entities often assess whether they are a principal or an agentbased solely on the indicators in IFRS 15.B37 and overlook the concept of control. Theyalso commented that assessing whether an entity controls the specified good or servicebefore that good or service is transferred to the customer can be judgmental andchallenging in practice, especially for transactions involving intangible or non-physicalitems, “flash title” contracts or provision of services. They considered that the indicatorsin IFRS 15.B37 are more applicable to physical goods.Considering that the assessment of principal versus agent has been a long-standingissue, and that new forms of operation, such as digital platforms, have introducedadditional challenges, we recommend that the IASB incorporate the key messages inBC385H into the body of the Standard to emphasize that the indicators were included tosupport an entity’s assessment of whether it controls a specified good or service beforetransfer but they should not override the assessment of control. Furthermore, werecommend the IASB add indicators in IFRS 15.B37 to assist entities in performing thecontrol assessment for intangible or service-based transactions and provide examplesto illustrate the application of the concept of control.Non-cash considerationNon-cash considerations (including in some cases consideration payable to a customer),such as shares and warrants, have become increasingly common after IFRS 15 becameeffective and their impact could be significant, particularly in light of the current volatilePage 2 of 9market. However, there is a lack of guidance on the following areas:

(a) Measurement dateEntities currently adopt different approaches regarding the measurement date of non-cash consideration. They measure it either at contract inception, when the non-cashconsideration is received, or when the related performance obligation is satisfied. Thetiming difference between these dates may have a significant impact on themeasurement of non-cash consideration. We consider that the requirement of Topic 606in US GAAP, which requires entities to measure non-cash consideration at contractinception, is consistent with other requirements in IFRS 15 for determining thetransaction price and for allocating the transaction price to performance obligations, andis less complex to apply in practice. Accordingly, we recommend the IASB referenceTopic 606 to address this issue which would have the added benefit of enhancingconvergence with US GAAP.(b) Subsequent changes in measurement of non-cash considerationThere is diversity in practice in the accounting for subsequent changes in measurementof non-cash consideration. Specifically, it is unclear whether it should be accounted foras variable consideration under IFRS 15 or under other applicable IFRS AccountingStandards, such as IFRS 9 Financial Instruments. Questions arise as to whether thevariable consideration requirements in IFRS 15 apply in circumstances where thechanges in the fair value of non-cash consideration relate to both the form ofconsideration and other reasons. We acknowledge that determining how to allocate fairvalue changes between those due to the form of the consideration and changes for otherreasons could be challenging in practice. In this regard, we recommend the IASB provideguidance on how to account for the changes in the fair value of non-cash considerationthat relate to both the form of consideration and other reasons, and expand the existingExample 31 on non-cash consideration to illustrate the relevant requirements.Determining the transaction priceWe noted several application issues regarding the determination of transaction price andrecommend the IASB clarify how the relevant requirements in IFRS 15 should be applied.These issues include:

How should an agent account for marketing incentives paid to end customers inthree-way arrangements?How should consideration payable to a customer be accounted for if it exceeds theamount of consideration expected to be received from the customer? andHow would an entity that is a principal estimate the amount of revenue to recognizeif it were not aware of the amounts being charged to end customers by the agent?If you have any questions regarding the matters raised in this letter, please contactKatherine Leung (katherineleung@hkicpa.org.hk), Associate Director or Sam Chan(samkcchan@hkicpa.org.hk), Manager of the Standard Setting Department.Sincerely,Cecilia KweiDirector of Standard SettingPage 3 of 9Work undertaken by the HKICPA in forming its views:

The HKICPA:

(a)

issued an Invitation to Comment on the RFI on 30 June 2023 to its members andother stakeholders;

(b)

sought input from its Revenue Recognition Advisory Panel, Small and MediumPractices Committee and its Technical Issues Support Group, which mainlycomprise technical and industry experts from large as well as small and mediumaccounting firms (collectively, Practitioners);

(c)

held a public roundtable discussion for local stakeholders, including Practitionersand preparers on 13 September 2023;

(d)

reviewed the findings from regulators’ reports focusing on the requirements in IFRS15; and(e)

developed its views through its Financial Reporting Standards Committee, havingreflected on its respondents’ views. The Committee comprises preparerrepresentatives from various industry sectors, regulators, as well as technical andindustry experts from small, medium and large accounting firms.Detailed comments on the IASB RFIQuestion 1 - Overall assessment of IFRS 15

1.We considered that IFRS 15 is an improvement on legacy IFRS and has achievedits objectives. The core principle of IFRS 15 and the five-step model are helpful inmaking revenue accounting decisions. However, there are certain aspects of therequirements that remain unclear, and additional guidance would be helpful inenhancing consistent application of the requirements. Please refer to our responsesbelow for areas where additional guidance is needed.Question 3 - Determining the transaction priceA.Marketing incentives to end customers

2.Our respondents shared the same comments as stated in spotlight 3 of the RFI thatthere is a lack of guidance in identifying an entity's customers when applying therequirements for consideration payable to a customer (CPC). Specifically, in three-way arrangements where an entity, acting as an agent, pays a marketing incentiveto the principal’s end customers, there are mixed views as to whether the reportingentity’s (agent) customers include the principal’s end customers outside thedistribution chain, and therefore whether such marketing incentive would fall withinthe scope of CPC and be accounted for as a reduction of revenue.

3.On the one hand, the guidance in IFRS 15.70 seems to imply that CPC refers topayments to customers in the distribution chain only. On the other hand, BC255mentions the concept of “customer’s customer” and provides an example where anentity may sell a product to a dealer or distributor and subsequently pay a customerof that dealer or distributor. Some respondents considered that payments tocustomers of a distributor are only an example of a “customer’s customer” and thatthe term “customer’s customer” could be interpreted more broadly.

4.It is very common for an agent to provide incentives (e.g. coupons, cash rebates)

to the principal’s customers who are not purchasing the agent’s goods or services(i.e. not in the distribution chain), e.g. a digital platform offers incentives to endcustomers who order food or taxi services through the platform. In many cases,AppendixPage 4 of 9these incentives are neither part of the contract with the principal nor a promisemade explicitly or implicitly to the principal, although the principal may be aware ofthese incentives. It is not clear whether such incentives which are intended toincrease the volume of transactions on which the agent earns its agency fee shouldbe accounted for as CPC (i.e. reductions of revenue) or as marketing expense.

5.We noted that the Transition Resource Group (TRG) had made relevantdiscussions on this matter. In particular, TRG Agenda No. 44 paragraphs 14-15discussed that an entity’s customers include those in the distribution chain and mayinclude a customer’s customer outside the distribution chain. In light of the above,we recommend that the IASB further explore the TRG discussions to provideguidance on the factors to consider in identifying an entity’s customers in relationto the requirements for CPC.B.“Negative” revenue

6.Our respondents (most notably the banking industry) noted that there is a lack ofguidance on how to account for CPC if it exceeds the amount of considerationexpected to be received from the customer. For example, in the credit card business,it is common for banks to offer marketing incentives to cardholders, who areconsidered as customers by most banks. The amount of marketing incentivesoffered to the cardholders in one promotion campaign could exceed the revenuegenerated by the specific transactions in the campaign. Some entities present it as“negative” revenue while others reclassify that excess as an expense. Someentities also questioned whether “negative revenue” should be assessed on acustomer basis instead of on a transaction basis given the business rationale forthe incentives is to promote the cardholders’ spending for the whole period of thecredit card contract.

7.We noted that a similar question was previously raised in the IFRS InterpretationsCommittee (IC) Agenda Decision on Compensation for Delays or Cancellationsregarding whether the amount of compensation recognized as a reduction ofrevenue is limited to reducing the transaction price to nil. However, the IC did notaddress this question. In this regard, we recommend the IASB clarify:

i. how to determine the unit of account for assessing whether there is negativerevenue, for example, whether it is assessed on a transaction basis, customerbasis or other basis; andii. how should entities present the excess amount, whether as negative revenue oras an expense.C.Determining amount of consideration to be recognized as a principal

8.Several respondents commented that it is challenging for the principal to estimatethe amount being charged to end customers by an intermediary (i.e. agent) indetermining the amount of consideration it recognizes. As a result, some entitieshave included an estimated amount in the consideration based on marketobservations (e.g. prices charged and discounts offered by platform operators inthe market), while others have not done so due to practical difficulties, particularlyin cases where discounts or rebates provided by the intermediaries arediscretionary and dependent on negotiations with individual end customers, or theprincipal is dealing with multiple agents in different regions.

9.In addition, some entities consider that the intermediary acts as the agent of theend customer, and argue that the intermediary and the end customer are of “onecustomer group”. Consequently, they only recognize the amount received directlyPage 5 of 9from the intermediary as revenue and do not estimate the amount received fromend customers by the intermediary. This results in diversity in practice.

10.To address this issue, some respondents suggested the IASB consider:

i.providing a practical expedient for entities to exclude the amount that is notexpected to be ultimately resolved (i.e. the difference between the amount towhich the entity is entitled from the intermediary and the amount charged by theintermediary to the end customer) from the transaction price with reference toTopic 6061; andii.clarifying whether the argument of “customer group” justifies the accountingtreatment.

11.We noted that this issue was considered by the IASB when it developed IFRS 15(refer to BC385X-BC385Z). At that time, the IASB concluded that this issue wasexpected to affect a limited number of entities and contracts and so did not requireany clarifications or additional guidance. Nevertheless, we noted that this issue isincreasingly prevalent among the advertising and gaming industries where theadvertising agencies or platform operators (i.e. the intermediaries) choose not todisclose to the principal how much they have received from end customers forcommercial reasons. Therefore, the principal could only recognize the amount itexpects to receive from the intermediary because it is difficult to estimate theamount paid by the end customers. In view of the practical challenges, werecommend the IASB consider our respondents’ suggestions in paragraph 10 toaddress this issue.D.Non-cash consideration

12.Several respondents commented that non-cash considerations (including in somecases consideration payable to a customer), such as shares and warrants, arepervasive nowadays but there is a lack of guidance on the following areas:

Measurement date of non-cash consideration

13.Entities currently adopt different approaches regarding the measurement date ofnon-cash consideration. They measure it either at contract inception, when the non-cash consideration is received, or when the related performance obligation issatisfied. The timing difference between these dates may have a significant impacton the measurement of non-cash consideration.

14.We noted from BC254E that the IASB had considered this issue when it developedIFRS 15. The IASB acknowledged that IFRS 15 does not contain any specificrequirements about the measurement date for non-cash consideration for revenuetransactions. However, the IASB did not address this issue at that time consideringthat any practical effect of different measurement dates would arise in only limitedcircumstances.

15.Nevertheless, as noted from our outreach activities, non-cash considerations havebecome increasingly common after IFRS 15 became effective and their impactcould be significant, particularly in light of the current volatile economic landscape.We consider that the requirement of Topic 606, which requires entities to measurenon-cash consideration at contract inception, is consistent with the requirements in1 BC38(c) of Accounting Standards Update No.2016-08 states that when the uncertainty in the transactionprice is not expected to be ultimately resolved, the difference between the amount to which the entity isentitled from the intermediary and the amount charged by the intermediary to the end customer is notvariable consideration and, therefore, is not part of the entity’s transaction price.Page 6 of 9IFRS 15 for determining the significant financing component in the transaction price(IFRS 15.64) and for allocating the transaction price to performance obligationsbased on stand-alone selling prices (IFRS 15.76), and is less complex to apply inpractice. Therefore, we recommend the IASB provide guidance on this matter withreference to Topic 606 which would also enhance convergence therewith.Subsequent changes in measurement of non-cash consideration

16.There is diversity in practice in the accounting for subsequent changes inmeasurement of non-cash consideration, specifically whether it should beaccounted for as variable consideration under IFRS 15, or under other applicableIFRS Accounting Standards, such as IFRS 9 Financial Instruments.

17.IFRS 15.68 states that the variable consideration requirements in IFRS15.56-58are applied if the fair value of the non-cash consideration varies for reasons otherthan only the form of the consideration. It is well understood that changes in the fairvalue of non-cash consideration that are due to the form of the consideration arenot subject to the constraint on variable consideration. Non-cash consideration thatis variable for reasons other than the form of the consideration is included in thetransaction price and is subject to the constraint on variable consideration. However,it is not clear whether the variable consideration requirements apply incircumstances where the change relates to both the form of consideration and otherreasons.

18.We noted that the TRG (TRG Agenda No.25 Topic 4 paragraphs 25-28) haddiscussed this issue and Topic 606 specifies that the constraint on variableconsideration applies only to variability in the fair value of the non-cashconsideration that arises after contract inception for reasons other than the form ofthe consideration.

19.We acknowledge that determining how to allocate fair value changes betweenthose due to the form of the consideration and changes for other reasons could bechallenging in practice. In this regard, we recommend the IASB provide guidanceon how to account for the change relates to both the form of consideration and otherreasons, with reference to the materials in paragraph 18 above, and expand itsexisting Example 31 on non-cash consideration in IFRS 15 to illustrate the relevantrequirements.Question 4 - Determining when to recognize revenue

20.We considered that there is a lack of guidance in determining the timing of revenuerecognition for an agent when the end customer has an unconditional right to returnthe goods or services facilitated by the agent. If the end customer exercises theright of return, the agent would not be entitled to any commission. It is not clearwhether the agent can apply IFRS 15.B21 to treat the contingent commission asvariable consideration or it should recognize the commission revenue only whenthe right of return expires. Accordingly, we recommend the IASB provideclarification on the timing of revenue recognition by an agent when the endcustomer has a right of return.Question 5 - Principal versus agent considerations

21.Our respondents noted that entities often assess whether they are a principal or anagent based solely on the indicators in IFRS 15.B37 and overlook the concept ofcontrol. They also commented that it is judgmental and challenging in applying IFRSPage 7 of 9

15.B34A in assessing whether an entity controls the specified good or servicebefore that good or service is transferred to the customer in the following cases:

i. transactions involving intangibles or non-physical items in which the entity doesnot have physical possession of the goods, e.g. online games, mobileapplications and digital e-books are sold to end customers through onlineretailers.ii. “flash title” contracts, e.g. the reporting entity contracts with a supplier to providegoods or services through the reporting entity’s sales channels to its customers;

or where the legal title/ownership of the goods vests in a trading company for avery short time (such as a few hours or a day) before the goods are transferredto the end customers; andiii. provision of services, e.g. online car hailing platform where the entity does notbear any front-end inventory risk (i.e. no commitment to buy, no advancepayment or no prepaid deposit before a customer places an order).

22.We agree that transactions involving intangibles or non-physical items, as well asprovision of services, are widespread. We also acknowledge that the indicators inIFRS 15.B37 are more applicable to physical goods. Considering that theassessment of principal versus agent has been a long-standing issue, and that newforms of operation, such as digital platforms, have introduced additional challenges,we strongly recommend the IASB:

i. incorporate the key messages in BC385H into the body of the Standard toemphasize that the indicators in IFRS 15.B37 were included to support an entity’sassessment of whether it controls a specified good or service before transfer butthey should not override the assessment of control.ii. add other indicators in IFRS 15.B37 to help entities perform the assessment.These indicators include the discretion of an entity in supplier selection or theinvolvement of the entity in the determination of product or service specifications.We consider that these indicators are helpful in explaining further the existingindicator of “primarily responsible for fulfilling the promise” in IFRS 15.B37(a).For transactions involving non-physical goods or services, the commitment of anentity to pay for certain services or non-refundable advance payments made tothe suppliers may also indicate that the entity is exposed to certain risks beforethe specified service or good is transferred to a customer.iii. provide illustrative examples on the fact patterns in paragraph 21 above inassessing the concept of control. In particular, in relation to “flash title” contracts,IFRS 15.B35 states that an entity does not necessarily control a specified goodif the entity obtains legal title to that good only momentarily before legal title istransferred to a customer. We suggest the IASB incorporate this guidance whenit develops illustrative examples on “flash title” contracts.Question 6 - LicensingA.Accounting for licence renewals

23.We noted that there is diversity in practice in the timing of revenue recognition forlicence renewals. Some entities recognize revenue when the renewal period starts,while others recognize revenue when the renewal is agreed upon based on thejustification that the customer already controls the license, and renewing it merelychanges an attribute of the license that has already been transferred to thecustomer previously. So entities recognize revenue for the licence renewals whenthe renewal is agreed upon.Page 8 of 9

24.Though the issue of licence renewals are not common in Hong Kong and MainlandChina, we suggest the IASB consider providing guidance on the timing of revenuerecognition for licence renewals by making reference to Topic 606, which requiresentities to recognize revenue no earlier than the beginning of the renewal period,to address the diversity in practice and enhance convergence with Topic 606.B.Sales-based or usage-based royalty exception

25.We noted that IFRS 15.B63 does not specify whether the sales-or usage-basedroyalty exception is applicable to the principal only or to both the principal and theagent. Accordingly, we recommend the IASB clarify whether an agent can applythe sales-or usage-based royalty exception in IFRS 15.B63 in recognizing its sales-or usage-based commission, and if so, under what circumstances an agent canapply the exception.Question 11 – Other matters

26.In our outreach activities, our respondents also shared the following applicationchallenges in IFRS 15. We noted that the IASB or the TRG had discussed theseissues. We consider that these discussions provide valuable insights and supportfor the application of the judgmental aspects of the Standard. To facilitate theconsistent application of IFRS 15, we recommend the IASB revisit these topics inthis PIR and incorporate the relevant discussions in the Basis for Conclusions orthe TRG meeting summaries into the body of the Standard.A.Identifying performance obligations in a contract

27.BC116K discussed the notions of “separable risks” and “transformative relationship”

when identifying performance obligations. As stated in that paragraph, the IASBhad considered the notion of “separable risks” as an alternative basis for assessingwhether an entity’s promise to transfer a good or service is separately identifiablefrom other promises in the contract but decided not to use this terminology in IFRS

15.Nevertheless, the notion of “separable risks” continues to influence the principleof separately identifiable in IFRS 15.27(b) when the IASB developed the standard.In addition, the IC has applied the concepts of “separable risks” and “transformativerelationship” in assessing the criteria in IFRS 15.27(b) in its Agenda DecisionRevenue recognition in a real estate contract that includes the transfer of land.

28.We consider that the discussions about “separable risks” and “transformativerelationship” in BC105 and BC116K would assist entities in determining whether agood or service is separately identifiable from other promises in the contract.Therefore, we recommend the IASB incorporate the guidance in these paragraphsinto the body of the Standard.B.Series of distinct goods or services

29.A respondent from the banking industry commented that it is challenging indetermining whether a series of distinct goods or services should be treated as asingle performance obligation, and whether such a series constitutes a promise ofproviding a service of standing ready to provide goods or services. Specifically,questions arise as to how entities should consider whether the performanceobligation consists of distinct goods or services that are substantially the samewhen applying the series provision in IFRS15.22(b).Page 9 of 9

30.We noted that the IASB has provided examples, in its Basis for Conclusions andIllustrative Examples accompanying IFRS 15, regarding the consideration of aseries of distinct goods or services. For instance, Example 7 and Example 13illustrate a series of distinct service in cleaning services and payroll processingservices respectively. BC285 discusses a series of distinct days of hotelmanagement service and BC160 illustrates the nature of promise of a health clubcontract is to stand ready for a period of time. However, these examples anddiscussions do not provide detailed analysis on why the series of goods or servicesare substantially the same.

31.We noted that TRG Agenda No.39 (Issue 1) and TRG Agenda No. 44 (Topic 5)

discussed this matter. In particular, paragraph 33 of TRG Agenda No. 44 providesclear guidance on how to apply the series provision practically. We consider that itwould be beneficial if the IASB provides guidance and illustrative examples bymaking reference to these TRG discussions. Additionally, the IASB could considerExample 12A-Series of Distinct Goods or Services of Topic 606-10-55-157B to157E which provides an example to illustrate the application of the series provision.C.Consideration payable to a customer

32.Some respondents noted that it is common for entities, such as the Technology,Media and Telecommunication industry and membership associations, to offerdifferent types of coupons (e.g. cash coupons, discount coupons, coupons for freegoods or services) to end customers after the sale transactions. Judgement is oftenrequired in determining whether the coupons should be accounted for as CPC,variable consideration, or customer options for additional goods or services.Different conclusions on the assessment could have a material impact in thedetermination of the transaction price and the timing of recognition.

33.We noted that there are various types of coupons in the market and each of thesecoupons could represent a different nature. We agree that judgement is required inaccounting for coupons and that further guidance could be provided with referenceto the relevant TRG discussions. Specifically, TRG Agenda No.14 paragraphs 7-21and TRG Agenda No.44 paragraphs 16-17 discussed an illustrative example (cashcoupons granted after sale transaction) and provided guidance on the interactionof the requirements of CPC and variable consideration. In addition, we recommendthe IASB provide illustrative examples to demonstrate how to determine whether acoupon is accounted for as CPC, variable consideration or customer option foradditional goods or services.~ End ~