Revenue & Leases (IFRS 15 & 16)

Why C? And why not the others?

Correct answer: C. It must be probable that the entity will collect the consideration it is entitled to, with IFRS defining 'probable' as more likely than not — a threshold just above 50%

IFRS 15 paragraph 9(e) requires, as one of five conditions for an arrangement to qualify as a contract, that it is probable the entity will collect the consideration it is entitled to in exchange for the goods or services transferred, considering only the customer's ability and intention to pay. IFRS defines 'probable' as more likely than not, a threshold just above 50%, so the assessment does not require near-certainty. The option describing a near-certainty standard sets the bar far higher than the standard requires. The option requiring a signed guarantee or credit insurance describes one possible way to support a collectability conclusion, but that evidence is not itself the threshold the standard defines — collectability can equally be supported by other evidence such as the customer's payment history or the entity's customary business practices. The option describing a much higher, roughly 75-80% style threshold describes how a similarly worded criterion is applied under a different accounting framework, not how IFRS 15 defines the same word.

Source: IFRS 15 Revenue from Contracts with Customers, paragraph 9(e) (collectability criterion for contract identification)

Why A? And why not the others?

Correct answer: A. Combine the two contracts and account for them as a single contract, because they were negotiated as a package with a single commercial objective and the consideration in one depends on the price of the other

IFRS 15 paragraph 17 requires an entity to combine two or more contracts entered into at or near the same time with the same customer, and account for them as a single contract, if any one of three conditions is met: the contracts were negotiated as a package with a single commercial objective; the consideration in one contract depends on the price or performance of the other; or the goods or services promised form a single performance obligation. Here two of those conditions are present, so combination is required. The option requiring different customers has the rule backwards — combination applies specifically to contracts with the same customer (or related parties of that customer), not different ones. The option tying combination to invoicing practice is wrong because how the entity chooses to invoice is an administrative matter that plays no role in the paragraph 17 test. The option tying combination to the number of physically signed documents is wrong because IFRS 15 looks to the substance of how the arrangements were negotiated and priced, not to their legal or physical form.

Source: IFRS 15 Revenue from Contracts with Customers, paragraph 17 (combination of contracts)

Why D? And why not the others?

Correct answer: D. Over the two-year term, because the company's ongoing activities significantly affect the intellectual property the customer has rights to, and the customer is exposed to the positive or negative effects of those activities as they occur — the hallmark of a right to access

IFRS 15 paragraph B58 sets out cumulative conditions under which a licence of intellectual property provides a right to access (recognized over time) rather than a right to use (recognized at a point in time): the contract requires, or the customer reasonably expects, that the entity will undertake activities that significantly affect the intellectual property to which the customer has rights; those activities expose the customer to positive or negative effects as they occur; and the activities do not themselves transfer a separate good or service. The scenario describes exactly this — ongoing signature updates that change the protection the customer receives — so revenue is recognized over the licence term. The option recognizing revenue on delivery of the license key ignores the B58 test entirely; delivery-triggered, point-in-time recognition is appropriate for a right-to-use licence that lacks these features, not automatically for every licence. The option tying the answer to contract duration is wrong because the over-time-versus-point-in-time distinction depends on the substance of the B58 criteria, not on how long the contract happens to run — a two-year right-to-use licence for static software with no required updates would still be recognized at a point in time. The option citing customer usage as the trigger invents a recognition basis IFRS 15 does not apply to licences; the standard's distinction turns on the access-versus-use test, not on when the customer happens to start using the software.

Source: IFRS 15 Revenue from Contracts with Customers, paragraph B58 (licences providing a right to access intellectual property)

Why B? And why not the others?

Correct answer: B. At the fair value of the shares if that fair value can be reasonably estimated; if it cannot be reasonably estimated, indirectly by reference to the standalone selling price of the consulting services promised to the customer

IFRS 15 paragraphs 66-67 require non-cash consideration to be included in the transaction price and measured at fair value. If the entity cannot reasonably estimate the fair value of the non-cash consideration, it instead measures the consideration indirectly by reference to the standalone selling price of the goods or services promised to the customer. The option using par or nominal share value is wrong because a certificate's stated par value is an arbitrary legal figure disconnected from fair value and is not a measurement basis IFRS 15 recognizes. The option excluding non-cash consideration from the transaction price entirely is wrong because IFRS 15 explicitly requires such consideration to be included in the transaction price at the time control of the related goods or services transfers, not deferred until a later cash sale. The option using the customer's own historical cost of issuing the shares is wrong because that amount reflects the customer's cost basis, not the fair value (or standalone-selling-price proxy) of what the supplier actually received in exchange for its services.

Source: IFRS 15 Revenue from Contracts with Customers, paragraphs 66-67 (non-cash consideration)

Why C? And why not the others?

Correct answer: C. The unbilled amount is a contract asset, because the contractor's right to consideration is conditional on something other than the passage of time (the inspection); the advance payment is a contract liability, because the contractor now owes the customer a performance obligation

IFRS 15 paragraphs 105-108 distinguish a contract asset — an entity's right to consideration in exchange for goods or services already transferred, when that right is conditional on something other than the passage of time — from an unconditional right to consideration, which is a receivable, and from a contract liability — an entity's obligation to transfer goods or services to a customer for which the entity has already received (or is due) consideration. The unbilled amount here depends on passing an inspection, a condition other than time, so it is a contract asset; the advance payment creates an obligation to perform, so it is a contract liability. The option calling both amounts receivables is wrong because a receivable requires an unconditional right to payment, which the milestone-dependent amount does not have. The option that swaps the two classifications is wrong on both counts: it mislabels the inspection-conditional amount as an obligation and the prepayment as an asset, the reverse of paragraphs 105-108. The option requiring immediate revenue recognition on both amounts is wrong because recognizing revenue depends on satisfying performance obligations under the contract's five-step model, not merely on cash receipt or the existence of a milestone.

Source: IFRS 15 Revenue from Contracts with Customers, paragraphs 105, 107-108 (contract assets, receivables and contract liabilities)

Why A? And why not the others?

Correct answer: A. Recognize revenue for the consideration it expects to be entitled to after excluding the estimated returns, recognize a refund liability for the amount expected to be refunded, and recognize an asset (with a corresponding adjustment to cost of sales) for its right to recover the returned products

IFRS 15 paragraphs B20-B22 require a seller with a right-of-return obligation to recognize revenue only for the consideration it expects to be entitled to after excluding expected returns (treating the return right as a form of variable consideration subject to the constraint), to recognize a refund liability for the amount it expects to refund, and to recognize an asset (with a corresponding adjustment to cost of sales) representing its right to recover the products expected to be returned. The option recognizing the full sales price with no return adjustment is wrong because a right of return is not a separate service obligation under IFRS 15 — it directly affects how much transaction price the entity is entitled to keep. The option deferring all revenue until the window closes is far more conservative than the standard requires; IFRS 15 permits recognizing revenue immediately once expected returns can be reasonably estimated, which the retailer's extensive historical data supports. The option that nets the return rate into revenue but omits a refund liability is wrong because the model requires the refund obligation and the asset for recovered products to be recognized separately from the net revenue figure, not folded away once an estimate is applied.

Source: IFRS 15 Revenue from Contracts with Customers, paragraphs B20-B22 (rights of return)

Why D? And why not the others?

Correct answer: D. As a lease, because the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration — the truck is identified, substitution rights are absent, and the customer both directs its use and obtains substantially all of its economic benefits

IFRS 16 paragraphs 9-11 define a lease as a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration, which requires an identified asset (here the specific truck, with no supplier substitution right) and control resting with the customer, evidenced by the customer directing how and for what purpose the asset is used and obtaining substantially all of the economic benefits from that use. All of these features are present, so the arrangement is a lease. The option focused on legal title is wrong because IFRS 16's test turns on control of use, not on who holds legal title — a lessor commonly retains title throughout a lease term. The option requiring the word 'lease' or 'rental' in the contract's title is wrong because IFRS 16 looks to the substance of the arrangement rather than its label. The option citing a real-estate-and-equipment-only scope with a materiality threshold is wrong because the core lease definition applies broadly to identified assets of any type; IFRS 16 does provide separate, narrower recognition exemptions for short-term leases and low-value assets, but those are optional practical expedients, not a blanket restriction on which asset types or contracts can meet the definition of a lease in the first place.

Source: IFRS 16 Leases, paragraphs 9-11 (definition of a lease)

Why B? And why not the others?

Correct answer: B. The computers may qualify for the low-value asset exemption, which is assessed on an absolute basis regardless of lease term (the IASB's basis for conclusions describes low-value assets, such as small IT equipment, as around USD 5,000 or less when new); the building lease may separately qualify for the short-term lease exemption because its term is 12 months or less and it contains no purchase option

IFRS 16 paragraphs 5-8 provide two independent, optional recognition exemptions for lessees: short-term leases (a lease term of 12 months or less at commencement, with no purchase option) and leases of low-value assets. The low-value asset exemption is assessed on an absolute basis by reference to the value of the underlying asset when new, regardless of the lease term or the size of the lessee; the IASB's basis for conclusions describes the Board having in mind assets of around USD 5,000 or less when new, citing examples such as small IT equipment, tablets, personal computers and small items of office furniture. Because these are two separate exemptions, the computers can qualify under the low-value test on their own, and the building lease can independently qualify under the short-term test. The option requiring both conditions to hold at once is wrong because it treats two independent exemptions as if they were a single combined test. The option restricting the low-value exemption to intangible assets is wrong because the Board's own examples are physical items such as computers and furniture. The option claiming IFRS 16 abolished all lessee exemptions is wrong because these two practical expedients were retained specifically to reduce the burden of capitalizing immaterial or short-lived leases.

Source: IFRS 16 Leases, paragraphs 5-8 (recognition exemptions) and Basis for Conclusions paragraph BC100 (low-value assets)

Why C? And why not the others?

Correct answer: C. Each lessee applies a single lessee accounting model, recognizing a right-of-use asset and a lease liability for substantially all of its leases (subject to limited exemptions), while the lessor still classifies each lease as either a finance lease or an operating lease based on the transfer of risks and rewards of ownership

IFRS 16 paragraph 22 requires a lessee to apply a single accounting model, recognizing a right-of-use asset and a lease liability for substantially all of its leases, subject only to the short-term and low-value recognition exemptions; the old finance-versus-operating distinction was removed for lessees. IFRS 16 paragraphs 61-66, however, retain the previous dual classification approach for lessors, who must still classify each lease as a finance lease or an operating lease based on the extent to which the lease transfers the risks and rewards incidental to ownership of the underlying asset. So the lessor's model was left substantively unchanged even though the lessee's model changed fundamentally. The option claiming both parties now apply the identical single model is wrong because only lessees were moved to the single on-balance-sheet model; lessors kept the dual classification test. The option that swaps the two roles is wrong because it describes lessees as still using risk-and-reward classification and lessors as using the single right-of-use model, the reverse of what IFRS 16 actually requires. The option claiming neither party recognizes anything at commencement is wrong because lessees recognize a right-of-use asset and lease liability up front, and lessors recognize either a net investment in the lease (finance lease) or continue reporting the underlying asset (operating lease).

Source: IFRS 16 Leases, paragraph 22 (single lessee model) and paragraphs 61-66 (lessor classification)

Why A? And why not the others?

Correct answer: A. The interest rate implicit in the lease, if that rate can be readily determined; otherwise, the lessee's incremental borrowing rate

IFRS 16 paragraph 26 requires a lessee to discount lease payments using the interest rate implicit in the lease if that rate can be readily determined; if it cannot, the lessee uses its incremental borrowing rate instead. The option specifying weighted-average cost of capital is wrong because IFRS 16 does not reference a general corporate cost-of-capital figure at all — it specifies only the two rates above. The option specifying a risk-free government bond rate is wrong because the incremental borrowing rate is explicitly not risk-free: it is defined as the rate the lessee would have to pay to borrow, over a similar term and with similar security, the funds necessary to obtain an asset of similar value, so it reflects the lessee's own credit standing and the transaction's specific terms. The option allowing the lessee to pick whichever rate minimizes the liability is wrong because IFRS 16 does not grant that discretion; using an artificially low rate to shrink the reported liability would undermine faithful representation, which the standard's hierarchy of rates is specifically designed to prevent.

Source: IFRS 16 Leases, paragraph 26 and Appendix A (definition of the lessee's incremental borrowing rate)

Why D? And why not the others?

Correct answer: D. Remeasure the lease liability to reflect the revised future lease payments, discounted using the discount rate applied at lease commencement (left unchanged), with the corresponding adjustment made to the right-of-use asset

IFRS 16 paragraphs 27(b) and 42(b) require variable lease payments that depend on an index or a rate to be included in the initial measurement of lease payments using the index or rate at commencement, and then remeasured when there is a change in the future lease payments resulting from a change in that index or rate (typically when the adjustment to the cash payments takes effect). This remeasurement uses the discount rate applied at commencement, left unchanged, because a change in an index or rate is not a lease modification, and the offsetting entry adjusts the right-of-use asset rather than profit or loss. The option expensing the extra rent as incurred with no balance-sheet adjustment is wrong because index-linked variable payments are explicitly brought into the lease liability, unlike payments that are truly variable with no index or rate basis (for example, payments based purely on sales or usage), which are expensed as incurred and never enter the liability. The option treating the change as a lease modification requiring a revised discount rate is wrong because IFRS 16 distinguishes remeasurement triggered by an index or rate change (unchanged discount rate) from an actual lease modification, such as a change in the scope or consideration of the lease that was not part of its original terms (which can require a revised discount rate). The option ignoring the change entirely because it is 'fully variable' conflates index/rate-linked payments, which are on-balance-sheet and subject to remeasurement, with genuinely usage- or sales-based variable payments, which are the ones IFRS 16 keeps off the lease liability.

Source: IFRS 16 Leases, paragraphs 27(b) and 42(b) (variable lease payments that depend on an index or a rate)

Why B? And why not the others?

Correct answer: B. Because the transfer does not satisfy IFRS 15's requirements to be accounted for as a sale, the company continues to recognize the warehouse and instead recognizes a financial liability equal to the proceeds received, while the bank recognizes a financial asset for the same amount

IFRS 16 paragraphs 99-103 require an entity to first apply IFRS 15's requirements to determine whether the transfer of an asset in a sale-and-leaseback transaction is a sale. When it is not — as here, because the repurchase option indicates the bank has not obtained control of the warehouse — the seller-lessee continues to recognize the transferred asset and instead recognizes a financial liability equal to the proceeds received, accounted for applying IFRS 9; the buyer-lessor recognizes a financial asset for the same amount rather than the underlying property. The option describing derecognition and a right-of-use asset is wrong because that treatment applies only when the transfer does qualify as a sale under IFRS 15, which is not the case in this scenario. The option requiring immediate recognition of the full gain or loss is wrong because that outcome is not a general rule for every sale-and-leaseback transaction — even when a transfer does qualify as a sale, gain or loss is limited to the portion of the asset's rights transferred to the buyer-lessor rather than recognized in full, and here no sale has occurred at all, so no such gain or loss arises. The option placing the transaction outside IFRS 16's scope is wrong because sale-and-leaseback transactions, including those that fail the IFRS 15 sale test, are explicitly addressed within IFRS 16 itself rather than being left to IAS 16's revaluation model.

Source: IFRS 16 Leases, paragraphs 99-103 (sale and leaseback transactions)