TFRS 15 revenue from contracts with customers

At present, many transactions contain a significant financing component because the customer pays substantially before or after the goods or services have been provided. This can benefit the entity if the customer is financing the transaction by paying early, or this can benefit the customer if the entity finances the customer by delivering the good or service before payment occurs.

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

20 September 2021

If the timing of payments agreed to (either explicitly or implicitly) by the parties to the contract provides the customer or the entity with a significant benefit of financing the transfer of goods or services to the customer, the entity will need to adjust the promised amount of consideration for the effects of the time value of money when determining the transaction price.

Under TFRS 15 and the accounting instructions for TFRS 15, the entity is required to reflect the effects of the financing component in the transaction price by considering the time value of money (interest element). This requirement ensures that entities recognize revenue at an amount that reflects the cash payment that the customer would have made at the time that the goods or services were transferred (cash selling price).

These components can be explicitly stated or implied by the payment terms in a contract.

The table below outlines the impact of a significant financing component:

If the payment received is	The impact and effect	Result
In advance	The entity is borrowing funds from its customer	Finance expense and increased revenue
In arrears	The entity is providing financing to its customer	Finance income and a reduction in revenue

Paragraphs 60 and 61 of TFRS 15 and the accounting instructions for TFRS 15 state the following:

In determining whether a contract contains a financing component, and whether that financing component is significant to the contract, the entity must consider all relevant facts and circumstances, including both of the following:

The difference, if any, between the amount of promised consideration and the cash selling price of the promised goods or services, and
The combined effect of the expected length of time between when the entity transfers the promised goods or services to the customer and when the customer pays for those goods or services, and the prevailing interest rates in the relevant market.

Scenario – Receipts in advance

On 1 January 2021, Company XYZ entered into a contract with a customer to build a new machine. Control over the completed machine will pass to the customer in two years (which is the point in time at which Company XYZ’s performance obligation will be satisfied).

The contract contains two payment options – the customer can pay:

1. THB 7 million in two years (when it obtains control of the machine), or

2. THB 6 million at the start of the contract.

The customer decides to take the second option – paying THB 6 million.

The interest rate implicit in the transaction is 7.5%. However, because Company XYZ is effectively borrowing from its customer, Company XYZ is also required to consider its own incremental borrowing rate, which is determined to be 6%.

Therefore, the transaction that Company XYZ must recognize in the financial statements is as follows:

1. At the start of the contract, Company XYZ processes the following journal entry to recognize a contractual liability:

Date	Description	Debit	Credit
1 January 2021	Cash	THB 6,000,000
	Contractual liability		THB 6,000,000
Recording the money received from the client

2. Interest in year 1 will be THB 360,000 (THB 6,000,000 x 6%), and interest in year 2 will be THB 381,600 (THB 6,000,000 + THB 360,000) x 6%

Date	Description	Debit	Credit
31 December 2021	Interest expense	THB 360,000
	Contractual liability		THB 360,000
Recording interest expense in year 1
31 December 2022	Interest expense	THB 381,600
	Contractual liability		THB 381,600
Recording interest expense in year 2

3. At the date of transfer of the machine to the customer, the transaction will be recorded as follows:

Date	Description	Debit	Credit
1 January 2023	Contractual liability	THB 6,741,600
	Revenue from sale		THB 6,741,600
Recording sales transaction

Currently, this standard and the guidelines in the instructions apply only to listed or regulated companies reporting under the full TFRS. If smaller entities or non-publicly accountable entities would like to adopt this standard and the guidelines, they must adopt and apply the full set of TFRS for Publicly Accountable Entities.

For more information on significant financing components, please refer to the accounting instructions for TFRS 15 (Link in Thai) and IFRS 15.