Guidance Big 3 Standards Technology 1

Guidance on the
New Big-3 Standards
Technology Sector
October 2019
Introduction
Indonesia is committed to supporting International Financial Reporting Standards
(IFRS) as the globally-accepted accounting standards, and to continuing with the IFRS
convergence process, while further minimising the gap between Standar Akuntansi
Keuangan (SAK) and IFRS. The decision to elect the convergence approach instead
of a full adoption was based on the consideration of potential interpretation and
implementation issues.
Since making the public commitment to support IFRS on 8 December 2008, the Dewan
Standar Akuntansi Keuangan – Institut Akuntansi Indonesia (DSAK-IAI) has been
converging the SAK towards IFRS. The DSAK-IAI is currently working to reduce the gap
between SAK and IFRS implementation to one year.
As part of IFRS convergence, DSAK-IAI has adapted IFRS 9 Financial Instruments, IFRS
15 Revenue from Contracts with Customers, and IFRS 16 Leases to IFAS by issuing
PSAK 71, PSAK 72, and PSAK 73, respectively, in 2017.
This publication reflects the implementation developments and provides guidance on

the application of the new standards (PSAK 71, PSAK 72 and PSAK 73) specific to the
technology industry.
Table of Contents
Introduction 2
PSAK 71 – Financial Instruments 4
Overview 5
Classification and measurement – Business model assessment 6
Impairment of financial assets measured at amortised cost 9
Impairment – Scope exception for trade and lease receivables:
The simplified approach 10
Provision matrix 12
Intra-group loans 15
Cash advanced might not be fair value 16
Hedging 17
Financial liabilities 18
PSAK 72 - Revenue from contracts with customers 20
Overview 21
1. Identify the contract 22
2. Identify performance obligations 26
3. Determine transaction price 31
4. Allocate transaction price 35
5. Recognise revenue 37
Other consideration 44
PSAK 73 - Leases 52
Overview 53
Components, contract consideration, and allocation 59
Lessee accounting model 61
Lease modification and reassessment (lessee) 64
Sale and leaseback arrangements 65
PSAK 71
Financial instruments
In 2017, the DSAK-IAI published the complete version

of PSAK 71, ‘Financial instruments’, which replaces
most of the guidance in PSAK 55 ‘Financial Instruments:
Recognition and Measurement’. This includes amended
guidance for the classification and measurement of
financial assets by introducing a fair value through
another comprehensive income category for certain
debt instruments. It also contains a new impairment
model, which will result in earlier recognition of losses.
No changes were introduced for the classification

and measurement of financial liabilities, except for the
recognition of changes in the entity’s credit risk in other
comprehensive income for liabilities designated at fair
value through the profit or loss.
PSAK 71 also includes the new hedging guidance.
These changes are likely to have a significant impact on

entities that have significant financial assets.
PSAK 71 will be effective for annual periods beginning

on or after 1 January 2020.
PSAK 71 - Financial instruments
PSAK 71 – Financial Instruments

Application in the technology industry
Overview What to do now?

PSAK 71 will affect the technology Technology to-do list
industry with an effective date of 1 Here is your immediate to-do list for the
January 2020. implementation of PSAK 71:
Technology entities hold a number 1. Equity investments will all be held at fair
of financial instruments arising value, even if they are unquoted. There is no
from their core operations (contract cost exemption. An entity needs to decide if it
assets and trade receivables), from will make an irrevocable election to hold any
risk management activities (foreign equity instruments at fair value through other
exchange and interest rate hedges), comprehensive income. This can be done on an
or cash management and investing instrument-by-instrument basis. Note that this
activities (debt and equity investments). applies only to those investments in the scope
All financial assets need to be of PSAK 71 that are equity instruments in the
carefully assessed, to understand meaning of PSAK 50 paragraph 11. Instruments
the classification and impairment that are puttable or that impose a requirement
implications. on an entity to deliver cash on liquidation are not
PSAK 71 replaces the majority of equity instruments in the meaning of PSAK 71.
PSAK 55; it covers classification, 2. The impairment model has changed and, in
measurement, recognition and many cases, this will lead to a higher impairment
derecognition of financial assets and provision. Entities need to work through the
financial liabilities, and impairment of expected credit loss model, ensuring that
financial assets, and it provides a new expectations of forward-looking data are
hedge accounting model. incorporated.
“PSAK 71 – Financial Instruments: 3. Where PSAK 71 is applied, all hedging
Understanding the Basics” provides documentation must be re-done to show how
a comprehensive analysis of the new the new hedge accounting criteria have been
standards. This publication discusses satisfied.
some of the more significant impacts
on entities within the technology
industry.
A snapshot of the financial position of a technology company

A typical balance sheet of a technology company might include the following financial instruments or
receivables that fall under PSAK 71:
Current and non-current

Current assets Non-current assets
liabilities
• Trade receivables • Equity investments • Borrowings
• Derivative financial assets • Long-term trade receivables • Derivative financial liabilities
• Loan receivables, including • Lease liabilities
intercompany loans • Contingent consideration
from business combination
Guidance to the New Big-3 Standards: Technology Sector 5

Classification and measurement –

Business model assessment
Debt investments (including receivables)

Classification of debt investments under PSAK 71 is driven by the entity’s business model for
managing the financial assets and whether the contractual characteristics of the financial assets
represent solely payments of principal and interest (SPPI).
Is the objective of the entity’s business No Is the financial asset held to achieve
model to hold the financial assets to an objective by both collecting No
collect contractual cash flows? contractual cash flows and selling
financial assets?
Yes Yes
No
Do contractual cash flows represent solely payments of principal and interest?
FVPL
Yes Yes
Does the company apply the fair value option to eliminate an accounting mismatch? Yes
No No
Amortised cost FVOCI
Business model assessment

The classification and measurement of financial assets under PSAK 71 is determined based on two
criteria:
• The business model within which the entity holds the asset (business model test), and
• The cash flows arising from the asset (SPPI test – that is, the financial asset gives rise to cash
flows that are solely payments of principal and interest).
The business model test will determine the classification of financial assets that pass the SPPI test.
PSAK 71 makes a distinction between three different business models:
• Hold to collect: The entity holds the financial assets in order to collect the contractual cash flows.
The entity measures such assets at amortised cost.
• Hold to collect and sell: The entity holds the financial assets for both selling and collecting
contractual cash flows. The entity measures such assets at fair value through other
comprehensive income (FVOCI).
• Hold to sell: The entity holds the financial assets with an intention to sell them before their
maturity. The entity measures such assets at fair value through profit or loss (FVPL).
In addition, note that if a financial asset is not held within hold to collect or hold to collect and sell,
it should be measured at FVPL – this is the residual category in PSAK 71. Furthermore, a business
model in which an entity manages financial assets, with the objective of realising cash flows
through solely the sale of the assets, would also result in a FVPL business model.
6 Guidance to the New Big-3 Standards: Technology Sector


Business model assessment (cont’d)
Contractual cash flows analysis Equity investments

Management should also assess whether the Investments in equity instruments (as defined
asset’s contractual cash flows represent solely in PSAK 50, from the perspective of the issuer)
payments of principal and interest (‘the SPPI are always measured at fair value under PSAK
condition’). 71. The cost exception under PSAK 55 has
been removed even for unquoted investments.
This condition is necessary for the financial asset,
In limited circumstances, cost may be the
or a group of financial assets, to be classified at
appropriate estimate of fair value [PSAK 71 para
amortised cost or FVOCI. Principal and interest
PP.5.2.3].
are defined as follows:
Equity instruments that are held for trading are
• Principal is the fair value of the financial
required to be classified at FVPL, with dividend
asset at initial recognition. However, that
income recognised in the profit or loss. For
principal amount might change over the life
all other equities within the scope of PSAK 71,
of the financial asset (for example, if there are
management can make an irrevocable election
repayments of principal).
on initial recognition, on an instrument-by-
• Interest is typically the compensation instrument basis, to present changes in fair value
for the time value of money and credit in other comprehensive income (OCI) rather than
risk. However, interest can also include in the profit or loss. Dividends are recognised in
consideration for other basic lending risks (for the profit or loss unless they clearly represent a
example, liquidity risk) and costs (for example, recovery of part of the cost of an investment, in
servicing or administrative costs) associated which case they are recognised in OCI. There is
with holding the financial asset for a period of no recycling of amounts from OCI to the profit
time, as well as a profit margin. or loss (for example, on the sale of an equity
investment) and neither are there any impairment
requirements. There are additional disclosure
requirements if an entity elects to measure equity
instruments at FVOCI. [PSAK 60 paras 11A 11B].
No expected credit loss (ECL) provision is
recognised on equity investments (see the
section on ECL on debt measurement below.)


Business model assessment (cont’d)
What does this mean for the technology industry?
• Trade receivables in a technology entity will normally meet the hold to collect
Trade criterion. The payments would normally comprise solely the principal and
receivables interest.
• They would thus be measured at amortised cost.
• Equity instruments are measured at fair value under all circumstances. An

Equity entity can make an irrevocable election to measure equity investments at
investments fair value through OCI. There are additional disclosure requirements if this
election is used. No ECL is recognised for equity investments.
• For long-term investments, such as bonds, the entity will need to assess the
business model.
Investments • They might be classified at amortised cost, fair value through other
in bonds comprehensive income or fair value through the profit or loss.
• Derivatives remain classified at fair value through profit or loss.

Derivatives
• Monetary contingent consideration that the acquirer is due to pay or receive is

within the scope of PSAK 71. Contingent consideration assets and liabilities are
Contingent measured at FVPL. Any contingent consideration receivable previously classified
consideration as an available for sale (AFS) asset will need to be reclassified to FVPL.

Impairment of assets measured at

amortised cost
The impairment rules of PSAK 71 introduce a new, forward-looking, ECL impairment model, which will
generally result in earlier recognition of losses compared to PSAK 55.
Change in credit quality since initial recognition
Recognition of ECL
12-month ECL Lifetime ECL Lifetime ECL
Interest revenue
Effective interest on
Effective interest on gross amortised cost carrying
Effective interest on gross carrying amount
carrying amount amount (that is, net of
credit allowance)
Stage 1 Stage 2 Stage 3
Performing Underperforming Non-performing
(Initial recognition) (Assets with significant increase in credit risk (Credit-impaired assets)
since initial recognition)
• Stage 1 includes financial instruments that have not had a significant increase in credit risk since
initial recognition or that have low credit risk at the reporting date. For these assets, 12-month ECL
is recognised and interest revenue is calculated on the gross carrying amount of the asset.
• Stage 2 includes financial instruments that have had a significant increase in credit risk since
initial recognition (unless they have low credit risk at the reporting date) but are not credit-impaired.
For these assets, lifetime ECL is recognised, and interest revenue is still calculated on the gross
carrying amount of the asset.
• Stage 3 consists of financial assets that are credit-impaired (that is, where one or more events
that have a detrimental impact on the estimated future cash flows of the financial asset have
occurred). For these assets, lifetime ECL is also recognised, but interest revenue is calculated on
the net carrying amount (that is, net of the ECL allowance).

Impairment – Scope exception for

trade receivables: The simplified
approach
The general impairment model includes some operational simplifications for trade receivables,
contract assets and lease receivables, because they are often held by entities that do not have
sophisticated credit risk management systems.
These simplifications eliminate the need to calculate 12-month ECL and to assess when a significant
increase in credit risk has occurred.
For trade receivables or contract assets that do not contain a significant financing component, the
loss allowance should be measured at initial recognition and throughout the life of the receivable, at an
amount equal to lifetime ECL. As a practical expedient, a provision matrix could be used to estimate
ECL for these financial instruments.
For trade receivables or contract assets that contain a significant financing component (in accordance
with PSAK 72) and lease receivables, an entity has an accounting policy choice: either it can apply the
simplified approach (that is, to measure the loss allowance at an amount equal to lifetime ECL at initial
recognition and throughout its life), or it can apply the general model. An entity can apply the policy
election for trade receivables, contract assets and lease receivables independently of each other, but
it must apply the policy choice consistently.
Simplified
Lifetime
approach:
ECL
ECL
Total receivables or
contract assets that
contain a significant Policy
financing component choice
+ lease receivables
Monitor
significant
ECL
increases in
credit risk

Impairment – Scope exception for

trade receivables: The simplified
approach (cont’d)
• A trade receivable with a maturity of less than one year will most likely
qualify for the simplified model, since it will generally not contain a
Short-term significant financing component. Under the simplified approach, the entity
trade will recognise lifetime ECL throughout the life of the receivable. Materially
receivables higher provisions might not arise for short term trade receivables with
customers with a good collection history.
• For trade receivables that contain a significant financing component, for

Long-term example long-term receivables, the entity will have an accounting policy option.
trade • Intercompany loans would normally not qualify for the scope exclusion and the
receivables and full three-stage model would need to be applied.
• For long term investments, such as bonds, the entity will need to apply the
Financial full three-stage model.
investments
in bonds

Provision matrix
PSAK 71 allows an operational simplification whereby companies can use a provisions matrix to
determine their ECL under the impairment model.
How does a provision matrix work?

A provision matrix method uses past and forward information to estimate the probability of default of
trade receivables.
Step 1: Step 2:
Step 3: Step 4:
Define a period Calculate Step 5:
Calculate the Update for
of credit sales the payment Compute the
historical default forward-looking
and related bad profile for these ECL
rate information
debts receivables
Step 1
The first step, when using a provision matrix, is to define an appropriate period of time to analyse the
proportion of trade receivables written off as bad debts. This period should be sufficient to provide
useful information. Too short a period might result in information that is not meaningful. Too long
might mean that changes in market conditions or the customer base make the analysis no longer
valid. In the example, we have selected one year. The overall lease receivables were CU10,000 and the
receivables ultimately written off were CU300 in that period.
Total sales CU10,000

Bad debts written off out of these sales CU300
Step 2
In step 2, we determine the amount of receivables outstanding at the end of each time bucket, up until
the point at which the bad debt is written off. The ageing profile calculated in this step is critical for the
next step, when calculating default rate percentages.
Total sales (CU) 10,000 Total paid Ageing profile of sales (step 3)
Paid in 30 days (2,000) (2,000) 8,000
Paid between 30 and 60 days (3,500) (5,500) 4,500
Paid between 60 and 90 days (3,000) (8,500) 1,500
Paid after 90 days (1,200) (9,700) 300 (written off)

Provision matrix (cont’d)
Step 3
In this step, the entity calculates the historical default rate percentage. The default rate for each bucket
is the quotient of the default receivables in each bucket over the outstanding credit sales for that
period. For example, in the above information, CU300 out of the CU10,000 lease income for the period,
was written off.
Current sales – historical rate of default
Since all of the receivables relating to the sales made and those written off were current at some stage,
it can be derived that for all current amounts, the entity might incur an eventual loss of CU300. The
default rate would therefore be 3% (CU300/CU10,000) = For all current amounts.
Sales payments outstanding after 30 days
An amount of CU8,000 was not paid within 30 days. An eventual loss of CU300 was a result of these
outstanding receivables. Therefore, the default rate for amounts outstanding after 30 days would be
3.75%.
Remaining buckets
The same calculation is then performed for 60 days and after 90 days. Although the amount
outstanding reduces for each subsequent period, the eventual loss of CU300 was, at some stage, part
of the population within each of the time buckets, and so it is applied consistently in the calculation of
each of the time bucket default rates.
The historical default rates are determined as follows:
Sales payments Sales payments Sales payments

Current
outstanding after outstanding after outstanding after
sales
30 days 60 days 90 days
Ageing profile of sales(1) 10,000 8,000 4,500 1,500
Loss: (2) 300 300 300 300
Default rate: (2)/(1) (%) 3 3.75 6.67 20

Provision matrix (cont’d)
Step 4
PSAK 71 is an ECL model, so consideration should also be given to forward-looking information.
Such forward-looking information would include:
• Changes in economic, regulatory, technological and environmental factors (such as industry
outlook, GDP, employments and politics);
• External market indicators; and
• Customer base.
For example, the entity concludes that the defaulted receivables should be adjusted by CU100 to
CU400 as a result of economic changes affecting the industry. The entity also concludes that the
payment profile and amount of sales are the same. Each entity should make its own assumption of
forward-looking information. The provision matrix should be updated accordingly.
The default rates are then recalculated for the various time buckets, based on the expected future
losses.
Sales payments Sales payments Sales payments

Current
outstanding after outstanding after outstanding after
sales
30 days 60 days 90 days
Ageing profile of sales (1) 10,000 8,000 4,500 1,500
Loss: (2) 400 400 400 400
Default rate: (2)/(1) (%) 4 5 8.9 27
Step 5
Finally, take the default rates from step 4 and apply them to the actual receivables, at the period end,
for each of the time buckets. There is a credit loss of CU12 in the example illustrated.
Current
Total 30-60 days 60-90 days After 90 days
(0-30 days)
Trade receivable balances
140 50 40 30 20
at year end: (1)
Default rate: (2) (%) 4 5 8.9 27
Expected credit loss:
CU 12 CU 2 CU 2 CU 3 CU 5
(1)*(2)

Intra-group loans
The scope for the accounting of intra-group loans and loans to joint ventures and associates (‘funding’) is
not expected to change from the introduction of PSAK 71. Funding, previously within the scope of PSAK
55, ‘Financial instruments: Recognition and measurement’ will also be within the scope of PSAK 71.
The impact of PSAK 71 on intra-group funding might often be dismissed, because it is eliminated on
consolidation. However, the impact in separate financial statements could be significant.
Impairment of intra-group loans

Intra-group loans and loans to joint ventures and associates do not qualify for the simplifications in
PSAK 71. The full impairment model needs to be applied, so 12-month ECL will be recorded on the
day when funding is advanced.
Subsequently, if there is a significant increase in credit risk (for example, if the subsidiary’s, joint
venture’s or associate’s trading performance declines), the impairment loss will be increased to a
lifetime expected credit loss.
What does this mean for technology industry?

Intra-group funding and loans to joint ventures and associates with written terms would generally fall
within the scope of PSAK 71. All requirements of PSAK 71 will therefore apply, including impairment.
Under PSAK 71, entities will be required to ensure that they implement adequate processes for
collection of the information needed for impairment, for example:
• Indicators for a significant increase in credit risk must be developed.
• Forward-looking information, as well as past events, must be incorporated.
• The contractual period over which to assess impairment may not be clear.

Cash advanced might not be fair

value
Intra-group loans within the scope of PSAK 71 and loans to joint ventures and associates are required
to be measured at fair value on initial recognition. These loans may sometimes be either interest-free
or provided at below-market interest rates. In those cases, the amount lent is, therefore, not fair value.

Loans at below market or nil interest rate are not advanced at fair value. Practically, this means that
the cash advanced will not be the receivable recorded. Instead, the receivable will be recorded at a
lower amount, to take into account the impact of discounting at a market interest rate.
A day one difference arises between the cash advanced and the recorded receivable. If the loan is
advanced from a parent entity to its subsidiary, this difference is added to the cost of investment in the
subsidiary because it is the nature of the relationship that gives rise to the off-market/interest-free loan.
For loans to joint ventures and associates, this difference would also generally be added to the cost
of investment as the relationship between the investor and the joint venture or associate is often the
reason for the loan being off-market/interest-free.

Hedging
Hedging is a risk management activity. More specifically, it is the process of using a financial
instrument (usually a derivative) to mitigate all or some of the risk of a hedged item. Hedge accounting
changes the timing of recognition of gains and losses on either the hedged item or the hedging
instrument so that both are recognised in the profit or loss in the same accounting period in order to
record the economic substance of the combination of the hedged item and hedging instrument.
Simpli cation of hedge accounting, bringing it in line with an entity’s

risk-management strategy
Effectiveness testing is now more relaxed – No 80%-125%
Main changes Cost of hedging can be removed from hedging relationships and
to hedging deferred in OCI (accounting policy choice for some)
Exposures permitted to be hedged have expanded. For example, risk

components of non- nancial items
Net positions can now be hedged
For a transaction to qualify for hedge accounting PSAK 71 includes the following requirements:
• An entity should formally designate and document the hedging relationship at the inception of the
hedge. PSAK 71 requires additional documentation to show sources of ineffectiveness and how
the hedge ratio is determined.
• There must be an economic relationship between the hedging instrument and the hedged item.
• Credit risk should not dominate value changes.
• The hedge ratio should be aligned with the economic hedging strategy (risk management strategy)
of the entity.
What does this mean for technology industry?

Technology entities mostly hedge interest rate risks and, where relevant, foreign exchange currency
risks, by entering into interest rate and foreign currency swaps, forwards and options.
Entities will need to update their hedging documentation and ensure that a qualitative assessment of
effectiveness for each hedging relationship is performed.
There is no longer an 80-125% effectiveness ‘bright line’ effectiveness test. As such, a retrospective
effectiveness test is no longer required to prove that the effectiveness was between 80 and 125%.
However, all ineffectiveness should still be recorded in the income statement.
PSAK 71 gives companies a free choice over whether to adopt its new hedge accounting requirements
when PSAK 71 becomes mandatory in 2020. A company must either move all of its hedge accounting
to PSAK 71, or it must continue to apply PSAK 55 to all of its hedges.
However, all entities have to apply PSAK 71’s new disclosure requirements – including the new
disclosures around hedge accounting.

Financial liabilities
Debt modifications
Technology entities might restructure borrowings with banks to adjust interest rates and maturity
profiles and hence modify their debt.
When a financial liability measured at amortised cost is modified without this resulting in
derecognition, a difference arises between the original contractual cash flows and the modified cash
flows discounted at the original effective interest rate (the ‘gain/loss’).
Under PSAK 55, entities were permitted, although not required, to recognise the gain/loss in the
income statement at the date of modification of a financial liability. Many entities deferred the gain/
loss, under PSAK 55, over the remaining term of the modified liability by recalculating the effective
interest rate.
This will change on transition to PSAK 71 because the accounting will change. When a PSAK 71
financial liability measured at amortised cost is modified without this resulting in derecognition, the
gain/loss should be recognised in the profit or loss. Entities are no longer able to defer the gain/loss.
The changes in accounting for modifications of financial liabilities will impact all preparers, particularly
entities which were applying different policies for recognising gains and losses under PSAK 55.
Whilst entities were not required to change their PSAK 55 accounting policy, the impact on transition
to PSAK 71 should be considered. PSAK 71 is required to be applied retrospectively, so modification
gains and losses arising from financial liabilities that are still recognised at the date of initial application
(for example, 1 January 2020 for calendar year end companies) would need to be recalculated and
adjusted through opening retained earnings on transition. This will affect the effective interest rate and,
therefore, the finance cost for the remaining life of the liability.

PSAK 72
Revenue from contracts
with customers
Indonesian reporters must adopt the new revenue
standard in 2020. Almost all entities will be affected
to some extent by the new guidance, though the
effect will vary depending on the industry and
current accounting practices.
This publication reflects the implementation

developments over the past few years and highlights
certain challenges specific to entities in the
technology industry.
PSAK 72 - Revenue from contracts with customers
Implementation in the technology

sector
Overview
The technology industry comprises numerous subsectors, including, but not limited to, computers
and networking, semiconductors, financial technology, software and internet, the internet of things,
health technology, and clean technology. Each subsector has diverse product and service offerings
and various revenue recognition issues. Determining how to allocate consideration among elements of
an arrangement and when to recognise revenue can be extremely complex and, as a result, industry-
specific revenue recognition models were previously developed. The new revenue standard replaces
these multiple sets of guidance with a single revenue recognition model, regardless of the industry.
Whilst PSAK 72 includes a number of specific factors to consider, it is a principles-based standard.
Accordingly, entities should ensure that revenue recognition is ultimately consistent with the
substance of the arrangement.
This publication summarises some of the areas within the technology industry, broken down by step
of the model that may be significantly affected by the new revenue standard. The content in this
publication should be considered together with our “PSAK 72 – A Comprehensive Look at The New
Revenue Model”.
Entities that report under PSAK are required to apply PSAK 72 for annual reporting periods beginning
on or after January 1, 2020, and early adoption is permitted.

(2) Identify (3) Determine (4) Allocate

(1) Identify performance transaction (5) Recognise Other
transaction
the contract obligation price revenue consideration
price
1. Identify the contract
A contract can be written, orally discussed, or implied by an entity’s customary business practices.
Generally, any agreement with a customer that creates legally-enforceable rights and obligations
meets the definition of a contract. Legal enforceability depends on the interpretation of the law and
could vary across legal jurisdictions where the rights of the parties are not enforced in the same way.
Technology companies should consider any history of entering into amendments or side agreements
to a contract that either changes the terms of, or adds to, the rights and obligations of a contract.
These can be verbal or written, and could include cancellation, termination, or other provisions. They
could also provide customers with options or discounts, or change the substance of the arrangement.
All of these have implications for revenue recognition. Therefore, understanding the entire contract,
including any amendments, is important to the accounting conclusion.
As part of identifying the contract, entities are required to assess whether collection of the
consideration is probable, which is generally interpreted as a greater than 50% likelihood in PSAK.
This assessment is made after considering any price concessions expected to be provided to the
customer. In other words, price concessions are variable consideration (which affects the transaction
price), rather than a factor to consider in assessing collectability.
New guidance Current PSAK

An entity will account for a contract with a customer when: An entity is required to consider
• the parties have approved the contract, the underlying substance and
• each party’s rights to goods or services to be transferred can economics of an arrangement,
be identified, not merely its legal form.
• the payment terms are defined,
• the contract has commercial substance, and An entity must establish that it
• it is probable the entity will collect substantially all of the is probable that the economic
consideration. benefits of the transaction will
flow to the entity before it can
The assessment of whether an amount is probable of being recognise revenue.
collected is made after considering any price concessions
expected to be provided to the customer. Management should first A provision for bad debts
determine whether it expects the entity to accept a lower amount (incurred losses on financial
of consideration from the customer than the customer is obligated assets including accounts
to pay, then determine if the remaining amount is collectible. receivable) is recognised in a
two-step process: (1) objective
If management concludes collection is not probable, the evidence of impairment must
arrangement is not accounted for using the five-step model. In be present; then (2) the amount
that case, the entity will only recognise consideration received as of the impairment is measured
revenue when one of the following events occurs: based on the present value of
• There are no remaining obligations to transfer goods expected cash flows.
or services to the customer, and substantially all of the
consideration has been received and is nonrefundable
• The contract has been terminated, and the consideration
received is non-refundable


transaction
price
1. Identify the contract (cont’d)
Potential impact:
The assessment of whether a contract with a customer exists under the new revenue standard is
less driven by the form of the arrangement, and more based on whether an agreement between two
parties (either written, oral, or implied) creates legally enforceable rights and obligations between the
parties.
The purpose of the collectability assessment under the new guidance is to determine whether there
is a substantive contract between the entity and the customer, which differs from current guidance in
which collectability is a constraint on revenue recognition.
The new guidance also eliminates the cash-basis method of revenue recognition that is often applied
today if collection is not probable.
Entities that conclude collection is not probable under the new guidance cannot recognise revenue
for cash received if (1) they have not collected substantially all of the consideration and (2) continue to
transfer goods or services to the customer.
Example 1(a) – Assessing collectability for a portfolio of contracts

Facts: Wholesaler sells network routers to a large volume of customers under similar contracts.
Before accepting a new customer, the wholesaler performs customer acceptance and credit
check procedures designed to ensure that it is probable the customer will pay the amounts owed.
The wholesaler will not accept a new customer that does not meet its customer acceptance
criteria.
In January 20X0, the wholesaler delivers routers to multiple customers for consideration
totalling CU100,000. The wholesaler concludes that control of the routers has transferred to
the customers and there are no remaining performance obligations. The wholesaler concludes,
based on its procedures, that collection is probable for each customer; however, the historical
experience indicates that, on average, the wholesaler will collect only 95% of the amounts billed.
The wholesaler believes its historical experience reflects its expectations about the future. The
wholesaler intends to pursue a full payment from customers and does not expect to provide any
price concessions.
Question: How much revenue should the wholesaler recognise?
Analysis: Because collection is probable for each customer, the wholesaler should recognise
revenue of CU100,000 when it transfers control of the routers. The wholesaler’s historical
collection experience does not impact the transaction price because it concluded that the
collectability threshold is met and it does not expect to provide any price concessions.
The wholesaler should also evaluate the related receivables for impairment.


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Example 1(b) - Assessing collectability with a history of price concessions

Facts: Semiconductor Inc. enters into a contract to sell 100 chips to a Customer for a price of
CU10 per unit. Therefore, the total price of the contract is CU1,000. Semiconductor Inc. has
a history of providing price concessions to the Customer. Semiconductor Inc. estimates it will
provide a price concession for 20% of the contract price, such that the total amount it expects to
collect in the arrangement will be CU800. Based on its history with the Customer, Semiconductor
Inc. concludes the CU800 is probable of being collected. Assume all other requirements for
identifying a contract are met.
Question: Has Step 1 of the model been achieved, such that there is a valid contract?
Analysis: Yes. Because the transaction price for the contract is CU800 and Semiconductor
Inc. has concluded that collection of the CU800 is probable, and the criteria for identifying a
valid contract with a customer have been met. Semiconductor Inc. will continually reassess the
estimated price concession (variable consideration) each reporting period and recognise changes
to estimated price concessions as changes to the transaction price (revenue).
If the CU800 subsequently becomes uncollectible, Semiconductor Inc. should evaluate the related
receivable for impairment.
Example 1(c) - Collection not probable

Facts: Equip Co. sells equipment to its customer with three years of maintenance for a total
consideration of CU1,000, of which CU500 is due upfront and the remaining CU500 is due
in instalments over the three-year term. At contract inception, Equip Co. determines that the
customer does not have the ability to pay as amounts become due, and therefore collection of
the consideration is not probable. Equip Co. intends to pursue payment and does not intend to
provide a price concession. Equip Co. delivers the equipment at the inception of the contract. At
the end of the first year, the customer makes a partial payment of CU400. Equip Co. continues to
provide maintenance services, but concludes that collection of the remaining consideration is not
probable.
Question: Can Equip Co. recognise revenue for the CU400 partial payment received?
Analysis: No, Equip Co. cannot recognise revenue for the partial payment received because it
has concluded that collection is not probable. Therefore, Equip Co. cannot recognise revenue
for cash received from the customer unless it terminates the contract or stops transferring goods
or services to the customer. Equip Co. should continue to reassess collectability each reporting
period. If Equip Co. subsequently determines that collection is probable, it will apply the five-step
revenue model and recognise revenue accordingly.


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Contract modifications
It is common for companies in the technology industry to modify contracts to provide additional
goods or services, which may be priced at a discount. For example, a company may sell equipment
and maintenance to a customer in an initial transaction and then modify the arrangement to extend the
maintenance period. In general, any change to an existing contract is a modification per the guidance
when the parties to the contract approve the modification either in writing, orally, or based on the
parties’ customary business practices. Also, a new contract entered into with an existing customer
could be viewed as the modification of an existing contract depending on the facts and circumstances.
This determination may require judgment.
The new standard provides specific guidance on the accounting for contract modifications. A
modification is accounted for as either a separate contract or as part of the existing contract. This
assessment is driven by (1) whether the modification adds distinct goods and services and (2) whether
the distinct goods and services are priced at their standalone selling prices. PwC’s Revenue guide
includes more guidance on assessing whether contract modifications need to be accounted for as
such under the new guidance.
When service contracts are modified to renew or extend the services being provided, the added
services will often be distinct. The modification is accounted for as a separate contract if the services
are distinct and the price of the added services reflects the standalone selling price, including
appropriate adjustments to reflect the circumstances of the particular contract (e.g., a discount given
because the company does not incur the selling-related costs it incurs for new customers).
The modification is accounted for prospectively if the services are distinct, but the price of the added
services does not reflect standalone selling price; that is, any unrecognised revenue from the original
contract and the additional consideration from the modification is combined and allocated to the
remaining unsatisfied performance obligations under both the existing contract and modification.


transaction
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2. Identify performance
obligations
Many technology companies provide multiple products or services to their customers as part of a
single arrangement. Hardware vendors sometimes sell extended maintenance contracts or other
service elements with the hardware, and vendors of intellectual property (IP) licenses may provide
professional services in addition to the license. Management must identify the separate performance
obligations in an arrangement based on the terms of the contract and the entity’s customary business
practices. A bundle of goods and services might be accounted for as a single performance obligation
in certain fact patterns.

A performance obligation is a promise in a contract to transfer to a The revenue recognition
customer either: criteria are usually applied
• a good or service (or a bundle of goods or services) that is separately to each
distinct; or transaction. In certain
• a series of distinct goods or services that are substantially the circumstances, it might be
same and that have the same pattern of transfer to the customer. necessary to separate a
transaction into identifiable
A good or service is distinct if both of the following criteria are met: components to reflect the
• The customer can benefit from the good or service either on its substance of the transaction.
own or together with other resources that are readily available to Two or more transactions
the customer (capable of being distinct). might need to be grouped
• The good or service is separately identifiable from other goods or together when they are
services in the contract (distinct in the context of the contract). linked in such a way that the
Factors that indicate that two or more promises to transfer goods or commercial effect cannot be
services to a customer are not separately identifiable include (but are understood without reference
not limited to): to the series of transactions
as a whole.
a. The entity provides a significant service of integrating the goods
or services with other goods or services promised in the contract.
b. One or more of the goods or services significantly modifies or
customises the other goods or services.
c. The goods or services are highly interdependent or highly
interrelated.
Companies applying PSAK 72 should also consider the concept of
materiality when identifying performance obligations in the context of
the contract.


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obligations (cont’d)
Potential impact:
Assessing whether goods and services are capable of being distinct is similar to determining if
deliverables are separate components under existing PSAKs, although the definition is not identical.
Under the new guidance, management will assess if the customer can benefit from the good or
service with “resources that are readily available to the customer,” which could be a good or service
sold separately by the company or another entity, or a good or service the customer has already
obtained.
Entities will need to determine whether the nature of the promise, within the context of the contract,
is to transfer each of those goods or services individually or, instead, to transfer a combined item(s)
to which the promised goods or services are inputs. This will be a new assessment for companies as
compared to today.
Example 2(a) - Sale of hardware and installation services - separate performance

obligations
Facts: Vendor enters into a contract to provide hardware and installation services to the
Customer. Vendor always sells the hardware with the installation service, but the installation is not
so complex that the Customer could perform the installation on its own or use other third parties.
Question: Does the transaction consist of one or more performance obligations?
Analysis: The vendor should account for the hardware and installation services as separate
performance obligations.
The vendor does not sell the hardware and installation services separately; therefore, management
will need to evaluate whether the customer can benefit from the hardware on its own or together
with readily available resources. Because the Customer can either perform the installation itself
or use another third party, the Customer can benefit from (1) the hardware on its own and (2) the
installation services in connection with the hardware already received. The installation service
does not significantly integrate, modify, or customise the equipment; therefore, the Vendor’s
promise to transfer the equipment is separately identifiable from the Vendor’s promise to perform
the installation service. Accordingly, the equipment and the installation are distinct and accounted
for as separate performance obligations.
The conclusion would not change if the Vendor contractually required the Customer to use the
Vendor’s installation services because absent the contractual requirements, the Customer could
perform the installation itself or use another third party.
As discussed in step 5, the Vendor should recognise revenue allocated to the hardware when
it transfers control of the hardware to the Customer. The Vendor should assess whether the
performance obligation for installation services is satisfied over time or at a point time, and
recognise the allocated revenue accordingly.


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Example 2(b) - Sale of hardware and installation services - single performance obligation
Facts: A Vendor enters into a contract to provide hardware and installation services to the
Customer. The Vendor also provides the customer with a license to software that is embedded
on the hardware that is integral to the functionality of the hardware. The installation services
significantly customise and integrate the hardware into the Customer’s information technology
environment. Only the Vendor can provide this customisation and integration service.
Question: Does the transaction consist of one or more performance obligations?
Analysis: The Vendor should account for the hardware with embedded software and installation
services together as a single performance obligation.
The new guidance states that a license that (1) forms a component of a tangible good and (2) is
integral to the functionality of the good is not distinct from the other promised goods or services in
the contract. Therefore, the license to embedded software is not distinct from the hardware. The
Vendor also provides a significant service of integrating the hardware and the installation services
into the combined item in the contract (a customised hardware system). Therefore, the hardware
with embedded software and the installation services are inputs into the combined item and are
not separately identifiable.


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Series of distinct goods or services
The new standard includes “series” guidance that does not exist in today’s revenue guidance. A
contract is accounted for as a series of distinct goods or services if, at contract inception, the contract
promises to transfer a series of distinct goods or services that (1) are substantially the same and (2)
have the same pattern of a transfer to the customer. A series has the same pattern of transfer if:
• Each distinct good or service in the series would be a performance obligation satisfied over time,
and
• The same method would be used to measure the entity’s progress toward complete satisfaction of
the performance obligation.
Judgment will be required to assess if the underlying goods or services meet these criteria. If
the criteria are met, the goods or services are combined into a single performance obligation.
However, management should consider each distinct good or service in the series, rather than the
single performance obligation, when accounting for contract modifications and allocating variable
consideration.
Example 2(c) - Accounting for a series - transaction processing

Facts: Transaction Inc. enters into a two-year contract with the Customer to process credit card
transactions. The Customer is obligated to use Transaction Inc.’s system to process all of its
transactions; however, the ultimate quantity of transactions is unknown. Transaction Inc. concludes
that the nature of its promise is a series of distinct monthly processing services. Transaction Inc.
charges the Customer a monthly fee calculated as CU0.03 per transaction processed. The fees
charged by Transaction Inc. are priced consistently throughout the contract.
Question: How should Transaction Inc. account for the contract?
Analysis: Transaction Inc. should account for the contract as a series of distinct goods or services,
and therefore, as a single performance obligation.
Transaction Inc. will stand ready to process transactions as they occur. The service of processing
credit card transactions for the Customer each day is substantially similar since the Customer is
receiving a consistent benefit on a daily basis.
As discussed in step 4, Transaction Inc. should allocate variable consideration to the distinct goods
or services within the series if certain criteria are met. As discussed in step 5, Transaction Inc.
would likely conclude it should recognise as revenue the variable monthly fee each month as the
variable fee relates to the services performed in that period.


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Customer options that provide a material rights
An option that provides a customer with free or discounted goods or services in the future might be a
material right. A material right is a promise embedded in a current contract that should be accounted
for as a separate performance obligation. If the option provides a material right to the customer, the
customer, in effect, pays the entity in advance for future goods or services, and the entity recognises
revenue when those future goods or services are transferred or when the option expires.
An option to purchase additional goods or services at their standalone selling prices is a marketing
offer and therefore not a material right. This is true regardless of whether the customer obtained
the option only as a result of entering into the current transaction. An option to purchase additional
goods or services in the future at a current standalone selling price could be a material right if prices
are expected to increase. This is because the customer is being offered a discount on future goods
compared to what others would have to pay as a result of entering into the current transaction.
Example 2(d) – Customer options - discounts on additional servers

Facts: Technology Inc. enters into a contract for the sale of a server for CU1,000. Technology
Inc. promises the customer a 30% discount off additional servers if those servers are purchased
before the end of the year. Technology Inc. typically provides a 10% discount to all customers
before the end of the year as a promotional offer to drive sales volume.
Question: Is the customer option a material right and a separate performance obligation?
Analysis: Technology Inc. should account for the promise to provide the incremental discount as a
material right. As such, it is a separate performance obligation and Technology Inc. should allocate
a portion of the transaction price to the material rights.
Because all customers will receive a 10% discount on servers during the same timeframe, the
standalone selling price of the material rights should be based on the incremental 20% discount
offered in the contract (i.e., 30% offered to this customer and 10% offered to other customers).
Technology Inc. should also adjust the standalone selling price for the likelihood that the customer
will exercise the option. The amount of the transaction price allocated to the material rights is
recognised as revenue when the additional servers are purchased or when the option expires.


transaction
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3. Determine transaction price
The transaction price is the consideration a vendor expects to be entitled to in exchange for satisfying
its performance obligations in an arrangement. Determining the transaction price is straightforward
when the contract price is fixed, but is more complex when the arrangement includes a variable
amount of consideration. Consideration that is variable includes, but is not limited to, discounts,
rebates, price concessions, refunds, credits, incentives, performance bonuses, and royalties.
Additionally, as discussed in Step 1 (Identify the contract), management will need to use judgment to
determine when amounts it will not collect from its customers are due to collectability issues (i.e., Step
1 of the model) or due to price concessions through variable consideration (i.e., Step 3 of the model).
This will depend on the facts and circumstances of the arrangement.
To determine the transaction price, management will estimate the consideration to which it expects
to be entitled. Variable consideration is only included in the estimate of the transaction price to the
extent it is highly probable of not resulting in a significant reversal of cumulative revenue in the future.
PSAK defines probable as ‘more likely than not’, which is greater than 50%. Consideration payable to
a customer, rights of return, noncash consideration, and significant financing components are other
important concepts to consider in determining the transaction price.

The transaction price is the amount of consideration to Revenue is measured at the fair value of
which an entity expects to be entitled in exchange for the consideration received or receivable.
transferring promised goods or services to a customer. Fair value is the amount for which an
It includes an estimate of variable consideration based asset could be exchanged, or a liability
on the expected value or most likely amount approach settled, between knowledgeable, willing
(whichever is more predictive). parties in an arm’s length transaction.
Variable consideration included in the transaction price Trade discounts, volume rebates, and
is subject to a constraint. The constraint limits revenue other incentives (such as cash settlement
recognition as performance obligations are satisfied to discounts) are taken into account
the extent that a significant revenue reversal will not in measuring the fair value of the
occur. An entity will meet this objective if it is highly consideration to be received.
probable that there will not be a significant downward
Revenue related to the variable
adjustment of the cumulative amount of revenue
consideration is recognised when it is
recognised for that performance obligation in the future.
probable that the economic benefits
Management will need to determine if there is a portion will flow to the entity and the amount is
of the variable consideration (that is, a minimum amount) reliably measurable, assuming all other
that would not result in a significant revenue reversal and revenue recognition criteria are met.
include that amount in the transaction price.
Management will have to reassess its estimate of the
transaction price each reporting period, including
any estimate of the minimum amount of variable
consideration it expects to receive.


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price

(cont’d)
Potential impact:
The guidance on variable consideration might significantly affect the timing of recognition compared to
today. Technology companies often enter into arrangements with variable amounts, such as milestone
payments, service level guarantees with penalties, and refund rights, due to their focus on customer
adoption of cutting-edge products. Although judgment will be needed to determine the amount of
variable consideration that should be included in the transaction price, technology companies might
recognise revenue earlier than they do currently in many circumstances.
Example 3(a) – Variable consideration - performance bonus

Facts: The Contract Manufacturer enters into a contract with the Customer to build an asset for
CU100,000. The contract also includes a CU50,000 performance bonus paid based on the timing
of completion, with a 10% decrease in the bonus for every week that completion is delayed
beyond the agreed-upon completion date. Management estimates a 60% likelihood of on-time
completion, a 30% likelihood of the project being one week late, and a 10% likelihood that it will
be two weeks late based on relevant experience with similar contracts.
Question: How much of the performance bonus should the Contract Manufacturer include in the
transaction price?
Analysis: Management concludes that the most likely amount method is the most predictive
approach for estimating the performance bonus. Management believes that CU45,000 (CU50,000
less 10%, the bonus that will be earned with a one-week delay) should be included in the
transaction price as there is a 90% probability of achieving at least this amount. Therefore, it
meets the criterion that it is highly probable that including this amount in the transaction price
will not result in a significant revenue reversal. Management should update its estimate at each
reporting date.


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price

(cont’d)
Consideration payable to a customer
An entity might pay, or expect to pay, consideration to its customer. The consideration paid can be
cash, either in the form of rebates or upfront payments, or a credit or another incentive that reduces
amounts owed to the entity by a customer. Payments to customers can also be in the form of equity.
Management should consider whether payments to customers are related to a revenue contract
even if the timing of the payment is not concurrent with a revenue transaction. Such payments could
nonetheless be economically linked to a revenue contract; for example, the payment could represent a
modification to the transaction price in a contract with a customer. Management will therefore need to
apply judgment to identify payments to customers that are economically linked to a revenue contract.
An important step in this analysis is identifying the customer in the arrangement. Management
will need to account for payments made directly to its customer, payments to another party that
purchases the entity’s goods or services from its customer (that is, a customer’s customer within
the distribution chain), and payments to another party made on behalf of a customer pursuant to the
arrangement between the entity and its customer.
Consideration payable to a customer is recorded as a reduction of the arrangement’s transaction
price, thereby reducing the amount of revenue recognised, unless the payment is for a distinct good or
service received from the customer. If payment is for a distinct good or service, it would be accounted
for in the same way as the entity accounts for other purchases from suppliers. Determining whether a
payment is for a distinct good or service received from a customer requires judgment. An entity might
be paying a customer for a distinct good or service if the entity is purchasing something from the
customer that is normally sold by that customer.
Management also needs to assess whether the consideration it pays for distinct goods or services
from its customer exceeds the fair value of those goods or services. Consideration paid in excess of
fair value reduces the transaction price. It can be difficult to determine the fair value of the distinct
goods or services received from the customer in some situations. An entity that is not able to
determine the fair value of the goods or services received should account for all of the consideration
paid or payable to the customer as a reduction of the transaction price since it is unable to determine
the portion of the payment that is a discount provided to the customer.
Rights of return
Rights of return are considered a form of variable consideration, as they affect the total amount of
fees that a customer will ultimately pay. Revenue recognition when there is a right of return is based
on the variable consideration guidance, with revenue recognised to the extent it is highly probable
that a significant reversal of cumulative revenue will not occur. Therefore, revenue is not recognised
for products expected to be returned. A liability is recognised for the expected amount of refunds to
customers, which is updated for changes in expected refunds.
An asset and corresponding adjustment to cost of sales is recognised for the rights to recover goods
from customers on settling the refund liability, with the asset initially measured at the original cost
of the goods (that is, the carrying amount in inventory), less any expected costs to recover those
products. The asset is assessed for impairment if indicators of impairment exist.


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(cont’d)
Example 3(b) - Sale of product with a return right
Facts: Vendor sells and ships 10,000 gaming systems to the Customer, a reseller, on the same day.
The Customer may return the gaming systems to Vendor within 12 months of the purchase. The
Vendor has historically experienced a 10% return rate from the Customer.
Question: How should the Vendor account for the return rights?
Analysis: The Vendor should not record revenue for the gaming systems that are anticipated to
be returned (10% of the systems, 1,000 systems). The Vendor should record a refund liability for
1,000 gaming systems and record an asset for the rights to the gaming system assets expected to
be returned. The asset should be recorded at the original cost of the gaming systems. The Vendor
will not derecognise the refund liability and related asset until the refund occurs or the refund right
lapses (although the Vendor should adjust these amounts as it revises its estimate of returns over
time). The asset will need to be assessed for impairment until derecognition.
The transaction price for the 9,000 gaming systems that the Vendor believes will not be returned is
recorded as revenue when control transfers to the customer, assuming the Vendor concludes it is
highly probable that a significant reversal of cumulative revenue will not occur.
Non-cash consideration
Any non-cash consideration received from a customer needs to be included in the transaction price
and measured at fair value. PSAK 72 does not include specific guidance on the measurement date
of non-cash consideration and, therefore, different approaches may be acceptable. Management
should also consider the accounting guidance for derivative instruments to determine whether an
arrangement with a right to non-cash consideration contains an embedded derivative.
Significant financing component

Technology companies should also be aware of the accounting impact of significant financing
components, such as extended payment terms. If there is a difference between the timing of receiving
consideration from the customer and the timing of the entity’s performance, a significant financing
component may exist in the arrangement.
The new standards require entities to impute interest income or expense and recognise it separately
from revenue (as interest expense or interest income) when an arrangement includes a significant
financing component. However, as a practical expedient, entities do not need to account for a
significant financing component if the timing difference between payment and performance is less
than one year.
Management should determine if payment terms are reflective of a significant financing component or
if the difference in timing between payment and performance arises for reasons other financing. For
example, the intent of the parties might be to secure the rights to a specific product or service, or to
ensure that the seller performs as specified under the contract, rather than to provide financing.


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4. Allocate transaction price
Technology companies often provide multiple products or services to their customers as part of a
single arrangement. Under the new standard, they will need to allocate the transaction price to the
separate performance obligations in one contract based on the relative standalone selling price of
each separate performance obligation. There are certain exceptions when discounts or variable
consideration relate specifically to one or more, but not all, of the performance obligations.

The transaction price is allocated to separate performance obligations Consideration is
based on the relative standalone selling price of the performance obligations generally allocated
in the contract. Entities will need to estimate the standalone selling price for to the separate
items not sold separately. components in the
arrangement based on
A residual approach may be used as a method to estimate the standalone
a relative fair value or
selling price when the selling price for a good or service is highly variable or
cost plus a reasonable
uncertain.
margin approach. A
Variable consideration or discounts might relate only to one or more, but residual or reverse
not all, performance obligations in the contract. Variable consideration is residual method may
allocated to specific performance obligations if both of the following criteria also be used.
are met:
• the terms of the variable consideration relate specifically to the entity’s
efforts to satisfy the performance obligation or transfer the distinct good
or service (or to a specific outcome from satisfying the performance
obligation or transferring the distinct good or service)
• the outcome is consistent with the allocation objective.
A discount is allocated to a specific performance obligation if all of the
following criteria are met:
• the entity regularly sells each distinct good or service on a standalone
basis.
• the entity regularly sells, on a standalone basis, a bundle of some of
those distinct goods or services at a discount.
• the discount attributable to the bundle of distinct goods or services is
substantially the same as the discount in the contract and observable
evidence supports the discount belonging to that performance obligation.
Potential impact:
The basic allocation principle has not changed under the new guidance; however, there are three
specific differences that could affect allocation:
• An entity will allocate discounts and variable consideration amounts to specific performance
obligations if certain criteria are met.
• Under the new standard, the residual approach should only be used when the selling price of a good
or service is highly variable or uncertain. Before utilising this approach, management should first
consider whether another method provides a reasonable basis for estimating the standalone selling
price.


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4. Allocate transaction price

(cont’d)
Example 4(a) - Allocation of transaction price

Facts: Technology Inc. enters into an arrangement with a customer, Network Co., for a fixed fee
of CU10 million, which includes separate performance obligations for 100 servers (delivered at the
same time), network monitoring software, installation services, and post-contract support (PCS).
Technology Inc. can earn an additional CU500,000 per year for the next two years if it achieves
specified performance bonuses related to the performance of the servers, which it expects to
achieve based on history with similar arrangements. This type of bonus is common in Technology
Inc.’s other server-only transactions. Technology Inc. has concluded its standalone selling prices
for the performance obligations are as follows:
Performance obligation Standalone price

100 servers CU10 million
Installation CU500,000
Software license CU2.5 million
PCS CU1.125 million
Total CU14.125 million
Question: How should Technology Inc. allocate the transaction price to each performance
obligation?
Analysis: The total transaction price includes the fixed consideration of CU10 million plus the
estimated variable consideration of CU1 million for a total of CU11 million. Technology Inc.
allocates the CU10 million fixed consideration to all of the performance obligations based on the
relative standalone selling price.
The variable consideration, however, relates solely to the performance of the servers and
management has concluded that allocating the variable consideration directly to the servers is
consistent with the standard’s allocation objective (that is, the variable consideration allocated
directly to the servers depicts the amount of consideration that Technology Inc. expects to
be entitled to in exchange for transferring the servers to the customer). Therefore, CU8.08M
((CU10,000,000 * 70.8%) + CU1,000,000) will be allocated to the servers, CU350K will be
allocated to the installation, CU1.77M will be allocated to the software license and CU800K will be
allocated to the PCS.
If the criteria to allocate variable consideration to only one performance obligation were not met
(i.e., if the terms did not relate specifically to that performance obligation or the outcome was not
consistent with the allocation objective), the estimated transaction price of CU11 million would be
allocated to all performance obligations on a relative basis.


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5. Recognise revenue
Technology companies often have contracts that include a service (installation or customisation)
with the sale of goods (software or hardware products). The software, hardware, and services may
be delivered over multiple periods ranging from several months to several years. A performance
obligation is satisfied and revenue is recognised when “control” of the promised good or service is
transferred to the customer. A customer obtains control of a good or service if it has the ability to (1)
direct its use and (2) obtain substantially all of the remaining benefits from it. Directing the use of an
asset refers to a customer’s rights to deploy the asset, allow another entity to deploy it, or restrict
another entity from using it. Management should evaluate transfer of control primarily from the
customer’s perspective, which reduces the risk that revenue is recognised for activities that do not
transfer control of a good or service to the customer.

Over time revenue recognition Revenue recognition occurs at the
time of delivery, when the following
An entity transfers control of a good or service over time and,
conditions are satisfied:
therefore, satisfies a performance obligation and recognises
revenue over time, if one of the following criteria is met: • The risks and rewards of
ownership have been transferred.
a. The customer simultaneously receives the benefits
• The seller does not retain
provided by the entity’s performance as the entity
managerial involvement to the
performs.
extent normally associated with
b. The entity’s performance creates or enhances an asset
ownership, and does not retain
that the customer controls as the asset is created.
effective control.
c. The entity’s performance does not create an asset with
• The amount of revenue can be
an alternative use, and the entity has an enforceable right
reliably measured.
to payment for performance completed to date.
• It is probable that the economic
benefit will flow to the customer.
Point in time revenue recognition
• The costs incurred can be
A performance obligation is satisfied at a point in time if none measured reliably.
of the criteria for satisfying a performance obligation over
time are met. If the performance obligation is satisfied at a
point in time, indicators of the transfer of control include:
• The entity has a right to payment for the asset.
• The customer has a legal title to the asset.
Potential impact:
Entities that manufacture customised products and recognise revenue at a point in time under current
guidance will need to assess the new criteria, including whether the product has no alternative use
and whether they have a right to payment for performance completed to date. These entities could
potentially change from point-in-time recognition under current guidance to over time recognition if
the criteria are met.
The timing of revenue recognition for point-in-time arrangements could change (and be accelerated) for
some entities compared to current guidance, which is more focused on the transfer of risks and rewards
than the transfer of control. The transfer of risks and rewards is an indicator of whether control has
transferred under the new guidance, but entities will also need to consider the other indicators.


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5. Recognise revenue (cont’d)
Sales to distributors
Under current guidance, the “sell-through approach” is common in arrangements that include
dealers or distributors in which revenue is recognised once the risks and rewards of ownership
have transferred to the end consumer. The effect of the new standard on the sell-through approach
will depend on the terms of the arrangement and why sell-through accounting was applied
historically. Technology companies that apply the sell-through approach today should re-evaluate the
appropriateness of this approach under the new revenue recognition criteria.
Revenue is recognised under the new standard when a customer obtains control of the product,
even if the terms include a right of return or other price protection features. The transfer of risks and
rewards is an indicator of whether control has transferred, but entities need to consider additional
indicators. Therefore, revenue could be recognised earlier under the new standard. For example, if a
distributor has physical possession of the product, can direct the use of the product, and is obligated
to pay the seller for the product, control of the product may have transferred to the distributor even
when the seller retains some risks and rewards or the final price is uncertain. If the entity is able to
require the distributor to return the product (that is, it has a call right), control likely has not been
transferred to the distributor.
Since many distributors are thinly capitalised, an entity will also need to consider the impact of the
requirement to assess whether collection is probable (in step 1).
Example 5(a) – Sale of a product to a distributor with ongoing involvement

Facts: The Manufacturer uses a distributor network to supply its product to final customers. The
distributor takes title to the product, but may return unsold products at the end of the contract term.
Once the products are sold to the end customer, the Manufacturer has no further obligations related
to the product, and the distributor has no further return rights. Because of the complexity of the
products and the varied nature of how end users may incorporate them into their final products, the
Manufacturer supports the distributor with technical sales support, including sending engineers on
sales calls with the distributor.
Question: When should the Manufacturer recognise revenue?
Analysis: The Manufacturer should recognise revenue upon the transfer of control of the product to
its customer, the distributor. Therefore, the Manufacturer should assess the point in time that control
transfers based on the indicators, including transfer of title, risks and rewards, etc.
The Manufacturer should also consider whether there is a separate performance obligation to
provide sales support. Assuming the sale of the product and the sales support are separate
performance obligations, The Manufacturer should:
• recognise revenue allocated to the products when control of the goods transfers to the
distributor, subject to any anticipated returns, and provided collection of the consideration is
probable
• recognise revenue allocated to the support obligation over time as the support is provided.


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Example 5(b) – Sale of product to a distributor with a price protection clause

Facts: The Manufacturer sells products into its distribution channel. In its contracts with the
distributors, the Manufacturer provides price protection by reimbursing its distribution partner for
any difference between the price charged to the distributor and the lowest price offered to any
customer during the following six months.
Question: When should the Manufacturer recognise revenue?
Analysis: The Manufacturer should recognise revenue upon the transfer of control of the product to
the distributor. The price protection clause creates variable consideration. The Manufacturer should
estimate the transaction price using either the expected value approach or the most likely amount,
whichever is more predictive.
As discussed in step 3, the estimate of variable consideration is constrained to the amount that
is highly probable of not reversing. The Manufacturer will need to determine if there is a portion of
the variable consideration (that is, a minimum amount) that would not result in a significant revenue
reversal. Relevant experience with similar arrangements that allow the Manufacturer to estimate the
transaction price, taking into account the expected effect of the price protection provision, could
result in earlier revenue recognition as compared to the current practice.
“Right to invoice” practical expedient

As a practical expedient, management can elect to recognise revenue based on the amount invoiced
to the customer if that amount corresponds directly with the value to the customer of the entity’s
performance completed to date. Such an assessment will require judgment; management should
not presume that a negotiated payment schedule automatically implies that the invoiced amounts
represent the value transferred to the customer. Entities can look to the market prices or standalone
selling prices of the goods or services as evidence of the value to the customer; however, other
evidence could also be used to demonstrate that the amount invoiced corresponds directly with the
value transferred to the customer.
The right to invoice practical expedient is described as a measure of progress, but it effectively allows
entities to bypass significant portions of the revenue recognition model. If an entity elects the practical
expedient, it typically does not need to determine the transaction price, allocate the transaction price,
or select a measure of progress. Entities electing the right to invoice practical expedient can also elect
to exclude certain disclosures about the remaining performance obligations in the contract.


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Example 5(c) – Right to invoice practical expedient

Facts: Technology Inc. enters into a contract with a customer to provide hosting services for a
three-year period. The rates in the contract increase over time by an amount that is commensurate
with future market prices for hosting services at contract inception.
Question: Would it be appropriate for Technology Inc. to apply the right to invoice practical expedient?
Analysis: Technology Inc. could apply the right to invoice practical expedient if it concludes that the
rates charged in each billing period correspond directly with the value to the customer of the entity’s
performance. This conclusion would likely be supported by the fact that the rates increase at an
amount commensurate with future market prices. Additionally, an increase in the rates over time due
to an increase in the number of users or amount of data hosted may also provide evidence that the
rates charged correspond directly with the value to the customer.
Example 5(d) – Right to invoice the practical expedient

Facts: Payroll Co. enters into a contract with a customer to provide monthly payroll services over
a five-year period. The billing schedule in the contract requires lower monthly payments in the first
part of the contract, with higher payments later in the contract. The billing schedule escalates to
provide the customer with more liquidity in the early part of the contract because the customer has
current cash flow limitations. Payroll Co. provides the same service over the entire contract and
market prices of the service are not expected to increase in line with the escalating billing schedule.
Question: Would it be appropriate for Payroll Co. to apply the right to invoice the practical expedient?
Analysis: No, it would not be appropriate to apply the right to invoice practical expedient
because the amounts billed do not directly correspond to the value to the customer of the entity’s
performance. The rising rates in the contract were negotiated to provide the customer with more
liquidity, which is not related to the value to the customer of the entity’s performance.
Consulting and manufacturing service contracts

Many technology companies provide consulting and manufacturing services, including business
strategy services, supply-chain management, system implementation, outsourcing services, and
control and system reliance. Technology service contracts are typically customer-specific, and
revenue recognition is therefore dependent on the facts and circumstances of each arrangement.
Accounting for service revenues may change under the new standard as management must determine
whether the performance obligation is satisfied at a point in time or over time. We do not expect a
significant change in practice for many services; however, some products recognised at a point in time
on final delivery today could be recognised over time under the new standards. Management will need
to apply judgment to assess whether the asset has an alternative use and whether contract terms
provide the rights to payment for the performance completed to date.
For performance obligations satisfied over time, entities will use the method to measure progress that
best depicts the transfer of control to the customer, which could be an output or an input method.


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Example 5(e) – Consulting services – the performance obligation satisfied over time
Facts: The Computer Consultant enters into a three-month, fixed-price contract to track the
Customer’s software usage to help the Customer decide which software packages best meet
its needs. The Computer Consultant will share findings on a monthly basis, or more frequently if
requested, and provide a summary report of the findings at the end of three months. The Customer
will pay the Computer Consultant CU2,000 per month, and the Customer can direct the Computer
Consultant to focus on the usage of any systems it wishes to throughout the contract.
Question: How should the Computer Consultant recognise revenue in the transaction?
Analysis: The Computer Consultant should recognise revenue over time as it performs the services.
The Customer simultaneously receives a benefit from the consulting services as they are performed
during the three-month contract because the customer is able to receive findings at any time when
requested. Another vendor would not have to substantially reperform the work completed to date to
satisfy the remaining obligations.
Example 5(f) – Sale of specialised equipment - performance obligation satisfied over time
Facts: A Contract Manufacturer enters into a six-month, fixed-price contract with the Customer
for the production of highly customised equipment. The title to the equipment is transferred to the
Customer at the end of the six-month contract term. If the Customer terminates the contract for
reasons other than the Contract Manufacturer’s non-performance, the Contract Manufacturer is
entitled to payment for costs plus a margin for any work in process to date.
Question: How should the Contract Manufacturer recognise revenue in the transaction?
Analysis: The Contract Manufacturer should recognise revenue over time as it manufactures the
equipment. Given the highly customised nature of the equipment, the Contract Manufacturer’s
performance does not create an asset with an alternative use to the Contract Manufacturer.
Also, the Contract Manufacturer has an enforceable right to payment from the Customer for the
performance completed to date. The performance obligation, therefore, meets the criteria for
recognition over time.


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Intellectual property licenses

Licenses of intellectual property (IP) include, among others: software and technology; media and
entertainment rights; franchises; patents; trademarks; and copyrights. These arrangements also
frequently include other obligations, such as ongoing support, professional services, etc. Licenses can
include various features and economic characteristics, which can lead to significant differences in the
rights provided by a license. The terms might be perpetual or for a defined period of time.
An entity should first consider the guidance for identifying performance obligations to determine if the
license is distinct from other goods or services in the arrangement. For licenses that are not distinct,
an entity will combine the license with other goods and services in the contract and recognise revenue
when it satisfies the combined performance obligation.
Under PSAK, the nature of a license and, accordingly the timing of revenue recognition, is determined
by whether the entity’s activities significantly change the IP.
PSAK 72 includes an exception for the recognition of sales- or usage-based royalties from licenses
of IP. Revenue from the sales- or usage-based royalty is not recognised until the later of when (1)
the customer’s subsequent sales or usages occur or (2) the performance obligation to which some
or all of the sales- or usage-based royalty has been allocated is satisfied or partially satisfied. The
exception would also apply when a contract includes a royalty to both a license of IP and other goods
and services, and the license is the “predominant” item to which the royalty relates. However, the
exception does not apply to an outright sale of IP.

When a license is distinct, an entity must consider Fees and royalties paid for the use of an entity’s
the nature of the license to determine when to assets are recognised in accordance with the
recognise revenue. The new standard identifies substance of the agreement. This might be on a
two types of licenses of IP: (1) a right to access IP straight-line basis over the life of the agreement,
and (2) a right to use IP. for example, when a licensee has the rights to
Right to use IP use certain technology for a specified period of
time. Revenue may also be recognised upfront if
Licenses that provide a right to use IP are the substance is similar to a sale.
performance obligations satisfied at a point in
time. An assignment of rights for a fixed fee or a non-
Right to access IP refundable guarantee under a non-cancellable
contract that permits the licensee to exploit those
Licenses that provide a right to access an entity’s
rights freely when the licensor has no remaining
IP are performance obligations satisfied over
obligations to perform is, in substance, a sale.
time.


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Potential impact:
The new standard provides specific guidance for determining whether to recognise revenue from a
license at a point in time or over time. Whether the license is a perpetual license or a term license
does not impact the conclusion. Thus, the analysis under the new standard could result in a different
timing of revenue recognition as compared to today, depending on the entity’s current accounting
conclusions.
For licenses of IP with fees in the form of sales- or usage-based royalties, the exception provided in
the new guidance may result in a similar accounting outcome to today since entities typically do not
recognise revenue until royalties are received. However, the new guidance specifies that the period of
recognition should be the period the sales or usage occurs. As a result, if information from customers
is received on a lag basis, entities may need to estimate sales or usage prior to receiving this data
from the customer.
Example 5(g) – License to IP with a sales-based royalty

Facts: Vendor licenses its patented technology to customers for no upfront fee and 1% of future
product sales that incorporate the technology. The license term is equal to the remaining patent
term of three years.
Question: How should the Vendor recognise revenue in the transaction?
Analysis: Sales-based royalties from licenses of IP cannot be recognised until the customer’s
subsequent sales or usages occur. Therefore, the Vendor will recognise revenue in the period that
the customer’s sales occur. The Vendor may need to estimate sales in each reporting period if the
customer does not report sales until a later period.
Example 5(h) – License to IP with a sales-based royalty and guaranteed minimum

Facts: The Vendor licenses its patented technology to customers for no upfront fee and 1% of
future product sales that incorporate the technology. The license term is equal to the remaining
patent term of three years. The Vendor is entitled to a minimum payment of CU5 million at the end
of each year, regardless of the actual sales. The Vendor has concluded that control of the license
transfers at a point in time when the license period commences. The Vendor has also concluded
that it is probable it will collect the consideration to which it is entitled, and there are no further
obligations remaining after the license is transferred.
Question: How should the Vendor recognise revenue in the transaction?
Analysis: Since the Vendor is entitled to a minimum payment of CU5 million at the end of each
year, this amount of the consideration is not variable and should be recognised as revenue when
control of the license transfers to the customer (at the beginning of the license period). The Vendor
should also evaluate whether the arrangement contains a significant financing component since
the minimum payments are received over a three-year period. Any consideration from royalties in
excess of the minimum in a given year will be recognised in the period that the customer’s sales
occur.


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Other considerations
Principal versus agent (Gross versus net)

Some arrangements involve two or more unrelated parties that contribute to providing a specified
good or service to a customer. In these instances, management will need to determine whether the
entity has promised to provide the specified good or service itself (as a principal) or to arrange for
those specified goods or services to be provided by another party (as an agent). This determination
often requires judgment, and different conclusions can significantly impact the amount and timing of
revenue recognition.
This assessment is often required in technology industry arrangements. Common examples include
internet advertising, internet sales, sales of virtual goods and mobile applications/games, sales
through a travel or ticket agency, sales in which subcontractors fulfil some or all of the contractual
obligations, and sales of services provided by a third-party service provider.
Management should first obtain an understanding of the relationships and contractual arrangements
among the various parties. This includes identifying the specified good or service being provided
to the end customer and determining whether the entity controls that good or service before it
is transferred to the end customer. It is not always clear whether the entity obtains control of the
specified good or service. The revenue standard provides indicators to help management make this
assessment.

An entity is the principal and should present An entity presents revenue gross if the gross
revenue on a gross basis if it controls the economic benefit from the business activity
specified good or service before it is transferred results in an increase in the entity’s equity.
to the customer. Alternatively, the entity presents revenue net if
Indicators to assist entities in determining the gross economic inflows include amounts
whether it controls the good or service before it is collected on behalf of the principal.
transferred to the customer are: An entity is acting as the principal when it is
a. The entity is primarily responsible for fulfilling exposed to the overall risks and rewards of the
the promise transaction. The following are indicators to assess
in determining whether gross or net revenue
b. The entity has inventory risk presentation is appropriate:
c. The entity has discretion in establishing price a. Primary responsibility for providing the goods
Under the new standard, no single indicator is or services
determinative or weighted more heavily than b. Inventory risk
other indicators. However, some indicators may
provide stronger evidence than others, depending c. Latitude in establishing price
on the circumstances. d. Credit risk


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Other considerations (cont’d)
Potential impact:
Although the indicators in the new standard are similar to those in the current guidance, the purpose
of the indicators is different. The new standard requires an entity to assess whether it controls the
specified good or service, and the indicators are intended to support the control assessment. In
contrast, the current guidance is focused on assessing whether the entity has the risks and rewards of
a principal. Entities will therefore need to reassess their arrangements through the lens of the control
principle.
The new standard also provides more guidance on the unit of account that should be used in the gross
versus net assessment, which could result in changes to the assessment as compared to the current
guidance.
Example 6(a) – Principal vs agent: Online bookstore

Facts: WebCo operates a website that sells books. WebCo enters into a contract with Bookstore
to sell Bookstore’s books online. WebCo’s website facilitates payments between Bookstore and
the customer. The sales price is established by Bookstore, and WebCo earns a commission
equal to 5% of the sales price. Bookstore ships the books directly to the customer; however, the
customer returns the books to WebCo if they are dissatisfied. WebCo has the rights to return
books to Bookstore without a penalty if they are returned by the customer.
Question: Is WebCo the principal or agent for the sale of books to the customer?
Analysis: WebCo is acting as the agent of the Bookstore and should recognise the commission
revenue for the sales made on Bookstore’s behalf; that is, it should recognise revenue on a net
basis.
The specified good or service in this arrangement is a book purchased by the customer. WebCo
does not control the books before they are transferred to the customer. WebCo does not have the
ability to direct the use of the goods transferred to customers and does not control Bookstore’s
inventory of goods. WebCo is also not responsible for the fulfilment of orders and does not have
discretion in establishing prices of the books.
Although customers return books to WebCo, WebCo has the right to return the books to
Bookstore and therefore does not have substantive inventory risk. The indicators therefore support
that WebCo is not the principal for the sale of Bookstore’s books. Accordingly, WebCo should
recognise commission revenue when it satisfies its promise to facilitate a sale (that is, when the
books are purchased by a customer).


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Example 6(b) – Principal vs agent: Cloud computing

Facts: CloudCo provides its customers with a package of cloud services, including access to a
software-as-a-service (SaaS) platform owned and operated by a third party. CloudCo contracts
directly with the third party for the rights to access the SaaS platform as part of its service offering
to its customers. CloudCo determines that it is providing a significant service of integrating the
various services into a combined package to meet the customer’s specifications. Therefore, access
to the SaaS platform and the related services performed by CloudCo are not separately identifiable;
the contract contains a single performance obligation.
Question: Is CloudCo the principal or agent for the package of cloud services?
Analysis: CloudCo is the principal and should recognise revenue for the gross fee charged to
customers. Access to the SaaS platform is an input into the package of cloud services (the specified
good or service). CloudCo obtains control of the inputs, including access to the SaaS platform, and
directs their use to create the combined output for which the customer has contracted.
The conclusion could differ if CloudCo determines that access to the SaaS platform and the related
services performed by CloudCo are each distinct (and therefore, separate performance obligations).
In that case, CloudCo would determine whether it is the principal or agent separately for each
distinct good or service.


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Product warranties
It is common for technology companies to provide a product warranty in connection with the sale
of a product. The nature of a product warranty can vary from contract to contract. Some warranties
provide a customer with assurance that the related product complies with agreed-upon specifications
(assurance-type or standard warranties). Other warranties provide the customer with a service in
addition to the assurance that the product complies with agreed-upon specifications.
The new standard draws a distinction between product warranties that the customer has the option
to purchase separately (for example, warranties that are negotiated or priced separately) and product
warranties that the customer cannot purchase separately. Management will need to exercise judgment
to determine if a warranty includes a service component that is not sold separately and should be
accounted for as a separate performance obligation.

An entity should account for a warranty that the customer has Warranties that a customer can
the option to purchase separately as a separate performance purchase separately are typically
obligation that is satisfied over the warranty period. similar to extended warranty
A warranty that the customer does not have the option to contracts. Revenue from extended
purchase separately should be accounted for in accordance warranties is deferred and
with existing guidance on product warranties. recognised over the life of the
contract.
A warranty, or part of it, that is not sold separately but that
provides the customer with a service in addition to the Warranties that are not sold
assurance that the product complies with agreed-upon separately are accounted for
specifications, creates a performance obligation for the in accordance with provisions
promised service. guidance, resulting in recognition of
an expense and a warranty liability
An entity that cannot reasonably separate the service when the good is sold.
component from a standard warranty should account for both
together as a single performance obligation.
Potential impact:
Similar to existing guidance, warranties sold separately give rise to a separate performance obligation
under the new standard and, therefore, revenue is recognised over the warranty period. Warranties
that are separately priced may be affected, as the arrangement consideration will be allocated based
on the relative standalone selling price under the new standard.
Product warranties that are not sold separately and provide for defects that exist when a product is
shipped will result in a cost accrual similar to today’s guidance. Entities will have to assess whether
warranties that are not sold separately also provide the customer with a service. This assessment will
require judgment and is based on factors such as the nature of the tasks the entity will perform and
the length of the warranty coverage period.


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Example 6(c) − Product sale with optional warranty

Facts: Vendor sells a hard drive, keyboard, monitor, and a 12-month warranty that the customer
elected, but was not required, to purchase.
Question: How should the Vendor account for the warranty?
Analysis: The new standard requires the Vendor to account for the 12-month optional warranty as
a separate performance obligation because the customer can purchase the warranty separately
from the related goods. The fact that it is sold separately indicates that a service is being provided
beyond ensuring that the product will function as intended.
The Vendor allocates a portion of the transaction price to the warranty based on its relative
standalone selling price. The amount of revenue allocated to the warranty could therefore differ
from the stated price of the warranty in the contract. The Vendor will need to assess the best
measure of progress for the promise to provide the warranty to determine when the revenue
allocated to the warranty is recognised (that is, rateably over the warranty period or some other
pattern).
If the 12-month warranty were not optional, the vendor would assess whether the warranty
only provides the customer with assurance that the related product complies with agreed-upon
specifications or provides a service that is a separate performance obligation.


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Contract costs
Technology companies often pay commissions to internal sales agents, other employees, and third-
party dealers. Commission plans can often be complex and involve a number of different employees.
Some entities capitalise customer acquisition costs as an asset today, while other entities expense
these costs as incurred. The new standard requires entities to capitalise incremental costs of obtaining
a contract if the costs are expected to be recovered.
Entities should amortise any asset recognised from capitalising costs to obtain or fulfil a contract
(including capitalised sales commissions) on a systematic basis that is consistent with the transfer
to the customer of the goods or services to which the asset relates. Determining the amortisation
period requires judgment and is similar to estimating the amortisation or depreciation period for other
assets (such as a customer relationship acquired in a business combination). Amortising an asset
over a longer period than the initial contract may be necessary if an entity expects a customer to
renew the contract and does not pay commissions on contract renewals that are commensurate with
the commission paid on the initial contract. The level of effort to obtain a contract or renewal should
not be a factor in determining whether the commission paid on a contract renewal is commensurate
with the initial commission. Rather, entities should assess whether the initial commission and renewal
commission are reasonably proportional to the respective contract values.

Entities will recognise as an asset the incremental costs of obtaining a Given the lack of
contract with a customer if the entity expects to recover those costs. All definitive guidance,
other contract acquisition costs that are incurred regardless of whether some entities capitalise
a contract was obtained (e.g., employee salaries and legal fees) are costs of acquiring
recognised as an expense. customer contracts as
As a practical expedient, the revenue standard permits entities to expense intangible assets and
incremental costs of obtaining a contract when incurred if the amortisation amortise them over
period of the asset would be one year or less. the customer contract
period, while other
Contract costs recognised as an asset are amortised on a systematic basis entities expense the
consistent with the pattern of transfer of the goods or services to which the costs when incurred.
asset relates. In some cases, the asset might relate to goods or services
to be provided in future anticipated contracts (for example, service to be
provided to a customer in the future if the customer chooses to renew an
existing contract).
Entities will have to recognise an impairment loss if the carrying amount of
an asset exceeds:
1. The amount of consideration to which an entity expects to be entitled in
exchange for the goods or services to which the asset relates; less
2. The remaining costs that relate directly to providing those goods or
services.


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Potential impact:
Under the new standard, entities no longer have the option to capitalise costs to obtain a contract.
All incremental costs must be capitalised if the entity expects to recover the costs. Incremental costs
could include amounts paid not just to a single salesperson, but amounts paid to multiple employees
(e.g., a salesperson, manager, and regional manager) if the payment would not have been incurred if
the contract had not been obtained. Entities will have to apply judgment to identify all costs that are
incremental and to determine the amortisation period of the resulting asset.
Entities may reverse impairments when costs become recoverable; however, the reversal is limited to
an amount that does not result in the carrying amount of the capitalised acquisition cost exceeding the
depreciated historical cost.
Example 6(d) - Incremental costs to obtain a contract

Facts: A company’s vice president of sales receives a quarterly bonus, which is partially based on
total new bookings during the year. The bonus is also based on other factors, including individual
performance. The compensation committee has the discretion to determine the final amount of
the bonus payment and may decide not to pay any bonus.
Question: Is the quarterly bonus considered an incremental cost to obtain a contract?
Analysis: No, the payment is based on factors other than obtaining new contracts; therefore, it
would not be considered an incremental cost.
Example 6(e) – Amortisation of initial commission

Facts: A sales employee is paid a CU500 commission for each initial annual SaaS contract
obtained with a customer and CU250 for each annual renewal of the contract thereafter. The
company expects one customer to renew, and concludes that the renewal commission is not
commensurate with the initial commission. The average customer life is five years.
Question: What is the amortisation period for the initial commission and renewal commission for
the contract with this customer?
Analysis: Since the renewal commission is not commensurate with the initial commission and the
company expects the customer to renew, the company should amortise the initial commission
over a period longer than the initial contract term, say the average customer life of five years. As
a result, the company could amortise the initial CU500 commission over five years, or it could
separate the initial commission of CU500 into two components, and amortise CU250 over the
initial contract term of one year and the remaining CU250 over the five-year average customer life.

PSAK 73
Leases
In 2017, the DSAK-IAI issued PSAK 73 which

supersedes PSAK 30 Leases, ISAK 8 Determining
whether an Arrangement Contains a Lease, ISAK 23
Operating Leases - Incentives, ISAK 24 Evaluating
the Substance of Transactions Involving the Legal
Form of a Lease and ISAK 25 Land Rights. For
lessors, the accounting remains largely unchanged;
however, the accounting for lessees will change
significantly, with almost all leases being recognised
on the balance sheet. This and other provisions will
likely introduce some level of change for all entities
that are a party to a lease.
PSAK 73 - Leases
Overview
Entities in the technology sector are generally

frequent lessees and, at times, lessors of
assets. Lease accounting literature and related
interpretations under PSAK have sometimes
presented challenges for lessees and can result
in different financial reporting outcomes for
economically similar transactions based solely on
the nuanced terms of particular leasing transactions.
PSAK 73, ‘Leases’, requires that lease accounting
guidance is applied to any arrangement that conveys
control over an identified asset to another party. The
DSAK-IAI’s objectives for the new standard were
increased transparency and comparability across
organisations.
PSAK 73 requires lessees to capitalise all leases
with a term of more than one year. Almost all leases
will be recognised on the balance sheet, with a right
of use asset and financial liability that recognise
more expenses in the profit or loss during the earlier
life of a lease. This will have an associated impact
on key accounting metrics of lessees, and clear
communication will be required to explain the impact
of changes to the stakeholders.
Guidance for lessors remains substantially
unchanged from PSAK 30. Lessors are still required
to classify leases as either finance or operating, and
the indicators used to make that distinction are
again unchanged from PSAK 30. For a finance lease,
the lessor recognises a receivable at an amount
equal to the net investment in the lease; this is the
present value of the aggregate of lease payments
receivable by the lessor and any unguaranteed
residual value. For an operating lease, the lessor
continues to recognise the underlying asset on its
balance sheet.
Our “PSAK 73 – Leases, A new Era for Lease
Accounting” publication provides a comprehensive
analysis of the new standard from the perspective of
both lessee and lessor. This guide summarises the
main aspects of the standard that the technology
sector might face, focusing on some key challenges
and questions management should ask as they
prepare for transition.

PSAK 73 - Leases
Overview (cont’d)
Effective date and transition

The new standard is effective for annual reporting periods beginning on or after 1 January 2020. Early
adoption is permitted, but only in conjunction with earlier application of PSAK 72, ‘Revenue from
Contracts with Customers’. This means that an entity is not allowed to apply PSAK 73 before applying
PSAK 72.
In order to facilitate transition, entities can choose a ‘simplified approach’ that includes certain reliefs
related to the measurement of the right-of-use asset and the lease liability, rather than full retrospective
application; furthermore, the ‘simplified approach’ does not require a restatement of comparatives.
Any adjustment will have impact on Retained Earnings 1 January 2020 (Date of Initial Application). In
addition, as a practical expedient, entities are not required to reassess whether an existing contract is,
or contains, a lease at the date of initial application (i.e. such contracts are “grandfathered”) but can
apply the guidance regarding the definition of a lease only to contracts entered into (or changed) on
or after the date of initial application. This applies to both contracts that were not previously identified
as containing a lease applying PSAK 30/ISAK 8 and those that were previously identified as leases in
PSAK 30/ISAK 8. If the entity chooses this expedient, it shall be applied to all contracts.
Except for re-assessment of operating subleases ongoing at the date of initial application of PSAK 73,
a lessor is not required to make any adjustments on transition.
Impact
PSAK 73 will apply to all categories of contracts in the technology sector, except for licences of
intellectual property granted by a lessor that are within the scope of PSAK 72, Revenue from Contracts
with Customers. Other scope exceptions include rights held by a lessee under licensing agreements
(such as motion picture films, video recordings, plays, manuscripts, patents and copyrights), leases of
biological assets, service concession agreements and leases to explore for or use mineral and other
non-regenerative resources. There is an optional scope exemption for lessees of intangible assets
other than the licences mentioned above.
The new standard will have a significant impact on technology companies, in particular how they
identify embedded leases, allocate contract consideration to components, and the impact of reflecting
leases on a lessee’s balance sheet. However, the accounting changes are just the tip of the iceberg
in terms of the impact the new standard will have on technology companies. Companies will need to
analyse how the new model will affect current business activities, contract negotiations, budgeting,
key metrics, systems and data requirements, and business processes and controls.

PSAK 73 - Leases
Embedded leases
Technology companies often enter into arrangements that include a variety of products or services
and that may include a lease. For example, hardware vendors sometimes offer commercial equipment
leases together with service add-ons or vendors of IP licenses may sell subscriptions to a cloud based
storage solution in addition to the license. They may also use a data storage centre owned or managed
by a third-party hosting company. Regardless of how an arrangement is structured, lease accounting
guidance applies to any arrangement that conveys control over an identified asset to another party.
An arrangement is a lease or contains a lease if an underlying asset is explicitly or implicitly identified
and use of the asset is controlled by the customer.
If an arrangement explicitly identifies the asset to be used, but the supplier has a substantive
contractual right to substitute such asset, then the arrangement does not contain an identified asset.
A substitution right is substantive if the supplier can (a) practically use another asset to fulfil the
arrangement throughout the term of the arrangement, and (b) it is economically beneficial for the
supplier to do so. The supplier’s right or obligation to substitute an asset for repairs, maintenance,
malfunction, or technical upgrade does not preclude the customer from having the right to use an
identified asset.
An identified asset must be physically distinct. A physically-distinct asset may be an entire asset or a
portion of an asset. For example, a building is generally considered physically distinct, but one floor
within the building may also be considered physically distinct if it can be used independent of the
other floors (e.g., point of entry or exit, access to lavatories, etc.). A capacity or a portion of an asset
is not an identified asset if (1) the asset is not physically distinct (e.g., the arrangement permits use
of a portion of the capacity of a data storage centre) and (2) a customer does not have the rights to
substantially all of the economic benefits from the use of the asset (e.g., several customers share a
storage centre and no single customer has substantially all of the capacity).
A customer controls the use of the identified asset by possessing the rights to (1) obtain substantially
all of the economic benefits from the use of such asset (“benefits” element); and (2) direct the use of
the identified asset throughout the period of use (“power” element). A customer meets the “power”
element if it holds the rights to make decisions that have the most significant impact on the economic
benefits derived from the use of the asset. If these decisions are pre¬determined in the contract, for
the arrangement to be a lease, the customer must have the rights to direct the operations of the asset
without the supplier having the rights to change those operating instructions throughout the period of
use or has designed the asset (or specific aspects of the asset) in a way that predetermines how and
for what purpose the asset will be used.
Sometimes there may be terms in the contract that are included to protect the supplier’s asset and
supplier’s personnel. For example, a contract may require the asset to be used in a manner that
complies with regulations or may restrict usage of the asset up to a maximum capacity based on the
asset’s design constraints. The existence of such protective rights in and of itself does not prevent a
customer from having the right to direct the use of an asset.
The new model differs in certain respects from today’s risks and rewards model. Under current lessee
guidance, embedded leases are often off-balance-sheet operating leases and, as such, application of
lease accounting may not have had a material impact. Determining whether to apply lease accounting
to an arrangement under the new guidance is likely to be more important since virtually all leases will
result in recognition of a right-of use-asset and lease liability by the lessee.

PSAK 73 - Leases
Embedded leases (cont’d)
PwC observation
Some contracts that may contain a lease are the result of specific negotiations covering a variety
of goods and services, and they often involve extensive collaboration between the parties before
and during the term of the arrangement. In some cases, the factors that indicate that control
has passed to the customer may not be obvious and may require significant judgment. Careful
assessment of the facts and circumstances, considering all relevant rights will be required.
A thorough understanding of the facts and circumstances is important to the assessment of
a potential embedded lease, particularly as it relates to evaluating control when an identified
asset is present. The financial reporting function may need to engage engineers and the broader
commercial team to fully understand the relevant facts and circumstances associated with
arrangements that may be unique to the technology industry.
Example 1 – Whether an arrangement contains a lease: data centre arrangement

Facts: Technology Corp (“Customer”) enters into a two-year Service Level Agreement (SLA)
with the Data Centre Corp (“Supplier”) under which the Customer will place its servers and
related equipment in a locked wire cage in 10,000 square feet of the Supplier’s 120,000 square
foot multi-user data centre. There is no other data centre available that is suitable to meet the
Customer’s requirements. The space in the data centre can be divided into separate units by
placing removable cages. The Supplier has the right to move the Customer’s servers and related
equipment to a cage in another location in the data centre provided there is no disruption to
the Customer’s operations. The Supplier’s cost to move the Customer’s servers and related
equipment to another cage is minimal. The Customer will control access to its designated cage
and the Customer’s employees will operate the servers and related equipment. The Supplier
can only enter the cage for maintenance and monitoring purposes and to move the servers and
related equipment to another cage in the data centre. In addition to providing the data centre
infrastructure (e.g., HVAC, UPS, high speed Internet), the Supplier will also provide security and
monitoring services. Any infrastructure related outages above the agreed thresholds will require
the Supplier to pay a significant penalty to the Customer.
Scenario 1: The Supplier currently uses 80,000 of the remaining 110,000 square feet for an SLA
with another customer.
Question: Does the arrangement contain a lease?

PSAK 73 - Leases
Discussion: No, the arrangement does not contain a lease.

Although the amount of space the Customer uses is specified in the contract (10,000 square feet),
there is no identified asset. This space can change at the discretion of the Supplier, who has the
substantive rights to substitute the space for the Customer’s SLA because:
a. The Supplier has the practical ability to change the space used by the Customer throughout
the period of use due to (1) the Supplier’s legally enforceable right to move the Customer’s
server and related equipment to another cage in the data centre at any time during the term
of the arrangement without the Customer’s approval and (2) additional space (30,000 square
feet) being available for the Supplier to move the Customer’s equipment during the term of
the arrangement; and
b. The space can be easily re-configured with minimal additional cost. The Supplier would
derive an economic benefit from being able to make the most effective use of the data
centre space to accommodate more customers or to configure space more efficiently or
accommodate a request for additional space from an existing customer.
Scenario 2: The Supplier currently uses all of the remaining 110,000 square feet for an SLA
with another customer. There are three years remaining under that arrangement, which is non-
cancellable.
Question: Does the arrangement contain a lease?
Discussion: Yes, the arrangement contains a lease.
The Supplier’s substitution right is not substantive because alternative space is not readily
available in the data centre due to an existing non-cancellable agreement between the Supplier
and its other customer. Since the Supplier does not have practical ability to substitute the space,
the contract is dependent on the identified space.
The Customer has the right to control the use of the space throughout the period of use because:
a. The Customer has the right to obtain substantially all of the economic benefits from use of
the space used for its servers and related equipment throughout the period of use, and
b. The Customer makes the relevant decisions about how and for what purpose the space is
used by determining how its servers and related equipment will be operated by its employees
during the period of use.

PSAK 73 - Leases
Example 2 – Whether an arrangement contains a lease: cloud computing arrangement

Facts: Cloud Services Corp (“Supplier”) provides cloud based computing services to customers.
Its key offering is ‘Software as a Service’ cloud computing contract in which the customer
contracts to pay a fee in exchange for a right to receive access to the supplier’s application
software for a specified period. The infrastructure and any associated software are provided and
operated by the supplier, for example, it is within the power of the supplier to determine how and
when to update or reconfigure the software, or decide on what infrastructure is required for the
software to run effectively. Customers access the software as necessary online or via a dedicated
line. The contract also does not convey to the customer any rights over tangible assets.
Question: Does the contract contain a software lease?
Discussion: No, the arrangement does not contain a software lease.
This matter was considered by the IFRS Interpretation Committee and, in the March 2019
Rejection, the Interpretations Committee noted that such cloud based computing arrangement
does not provide the customer with a right to direct the use of an asset in the context of the new
leasing standard. When assessing whether the customer has the right to direct the use of the
identified asset, the key question is which party (that is, the customer or the supplier) has the
right to direct how and for what purpose the identified asset is used throughout the period of
use. However, the Supplier retained the relevant decision-making rights, for example, when and
whether to update or reconfigure the software or determining the level of capacity required for
connections and data storage throughout the contract period.
Accordingly, the customer only receives the right to access the supplier’s software.
Example 3 – Whether an arrangement contains a lease: warehouse space contract

Facts: The Warehousing Corp (“Supplier”) owns a large warehouse and provides third-party logistics
services to large companies. The warehouse can be subdivided into numerous subsections by
inserting removable walls. It makes available different portions of storage space to its customers
based on their respective needs. XYZ Corp (“Customer”) contracts with the Supplier to reserve 1,000
square feet of space to store its products for a three-year period. The contract specifies that the
Customer’s inventory will be stored in a specified location in the warehouse. However, the Supplier
has the legal right to move the Customer’s inventory to another location within its warehouse at its
discretion, subject to the requirement to provide 1,000 square feet for the three-year period. The
Supplier frequently reorganises its space to meet the needs of new contracts and has sufficient
alternative space to fulfil Customer’s requirements. The cost of reallocating space is low compared to
the benefits of being able to accommodate as many customers as possible in the warehouse.
Question: Does the contract contain a lease?
Discussion: Based on the facts in the example, the contract does not contain a lease.
The asset is not identified because the Supplier has substantive substitution rights. The Supplier
has agreed to provide a specific level of capacity within its warehouse but has the unilateral right to
relocate the Customer’s inventory and can do so without significant cost.

PSAK 73 - Leases
Components, contract
consideration, and allocation
A contract may contain lease and non-lease components. Only lease components are subject to the
balance sheet recognition guidance in the new lease standard. Components within an arrangement
are those items or activities that transfer a good or service to the customer.
A right to use an asset is a separate lease component if the lessee can benefit from the asset on its
own (or together with readily available resources) and the asset is neither interdependent nor highly
correlated with any other underlying asset in the contract. For example, if a lessee pays for the right to
use an asset and also for administrative tasks, which do not transfer a good or service to the lessee,
the administrative tasks are not a separate non-lease component. The amount due for administrative
tasks will be considered as part of the total consideration that is allocated to the separately identified
lease and non-lease components of the contract.
Once the lease and non-lease components are identified, both lessees and lessors must allocate
contract consideration to each component. A lessee will do so based on their relative standalone
prices. If observable stand-alone prices are not readily available, the lessee shall estimate the
prices, and should maximise the use of observable information. As a practical expedient, a lessee
may, as an accounting policy election by class of underlying asset, choose not to separate lease
components from the associated non-lease components and instead account for them as a single
lease component. A lessor should allocate contract consideration to the separate lease and non-lease
components in accordance with the transaction price allocation guidance in PSAK 72 (that is, on the
basis of relative stand-alone selling prices). The practical expedient available to a lessee for lease and
non-lease components is not available to a lessor.
PwC observation
In addition to typical real estate leases and equipment leases, technology companies often enter
into a variety of arrangements, such as outsourcing and supply agreements that may contain
leases. Technology companies will need to put processes in place to identify embedded leases
and then identify the lease and non-lease components. A process will also be needed to allocate
contract consideration to each component (absent the lessee making a policy election to not
separate a non-lease component from the associated lease component).

PSAK 73 - Leases
Components, contract
consideration, and allocation
(cont’d)
Example 4 – Identifying components within an arrangement: data centre

Facts: Colocation Corp (“Lessor”) and Tech Company (“Lessee”) enter into a lease of an entire data centre,
which grants the Lessee exclusive rights to use the data centre for a five-year period. The Lessee will occupy
the data centre and use its own resources and personnel to operate it. The monthly payment to Lessor
includes: (a) fixed rent for the data centre; (b) a fixed amount for property taxes and insurance; (c) a fixed
amount for security and cleaning; and (d) a fixed amount relating to the maintenance of the data centre.
Question1: What are the components in the lease?
Discussion: The lease component in the arrangement is the data centre and, additionally, the contract
includes two non-lease components - maintenance service and utilities. The fixed payments for property
taxes and building insurance that Lessee will make during the five-year lease term do not transfer a good or
service to the lessee, so they cannot be identified as separate components. They would instead be included
in the measurement of the transaction consideration to be allocated to the separately identified components
of the contract.
Security and cleaning services involve the provision of separate services to Lessee, and they are considered
as separate non-lease components. The Lessee can either: (1) separate the lease from the non-lease
components, and allocate consideration to each component; or (2) apply the practical expedient, and
account for both the lease and the associated non-lease component as a single, combined lease
component.
Due to the significance of the maintenance services, the Lessee elects not to apply the practical expedient of
combining the non-lease components with the associated lease components.
Once the lease and non-lease components are identified, contract consideration is allocated to each
component. Lessee should allocate the contract consideration to the separate lease and non-lease
components, based on their relative stand-alone prices.
The Lessor should allocate contract consideration to the separate lease and non-lease components in
accordance with the transaction price allocation guidance in PSAK 72. The practical expedient available to
the Lessee, for lease and non-lease components, is not available to the Lessor.
The guidance specifies that amounts payable by the Lessee for activities and costs that do not transfer a
good or service to the Lessee (for example, property taxes and insurance) are not separate components of
the contract, but they are considered as part of the total consideration allocated to the separately identified
components of the contract.
PwC observation
A lessee might elect to apply the practical expedient of accounting for a lease and the associated non-lease
component as a single lease component. If the practical expedient is applied, the cash flows associated
with the non-lease component will increase the liability and right-of-use asset recognised on the balance
sheet. This is an election by asset class. Technology companies are likely to consider the significance of the
increase in the right-of-use asset and liability relative to the effort and complexity required to obtain reliable
information to separately account for the lease and non-lease components. Technology sector lessees
with material leases will need additional processes, controls and documentation to ensure appropriate and
consistent application of the guidance. For example, the guidance requires an appropriate allocation based
on relative stand-alone prices that maximises the use of observable prices.

PSAK 73 - Leases
Lessee accounting model
Lessees will be required to recognise a right-of-use asset and liability for virtually all leases (other than
short-term leases or leases of low-valued assets for which they elect to apply an exemption). There
will be no distinction between finance and operating leases for lessee accounting, as is the case under
PSAK 30.
Lessees should initially recognise a right-of-use asset and lease liability based on the discounted
payments required under the lease, taking into account the lease term as determined under the new
standard. Determining the lease term will require judgment. Initial direct costs and restoration costs
are also included.
The key elements of the new standards and the effect on financial statements are as follows:
• A ‘right-of-use’ model replaces the ‘risks and rewards’ model. Lessees are required to recognise an
asset and liability at the inception of a lease.
• All lease liabilities are to be measured with reference to an estimate of the lease term, which
includes optional lease periods when an entity is reasonably certain to exercise an option to extend
(or not to terminate) a lease.
• The lessee subsequently measures the lease liability using the effective interest rate method. It
remeasures the carrying amount to reflect any re-assessment, lease modification, or revised in-
substance fixed lease payments.
• Contingent rentals or variable lease payments will need to be included in the measurement of
lease assets and liabilities when these depend on an index or a rate or where in substance they
are fixed payments. A lessee should reassess variable lease payments that depend on an index
or a rate when the lessee remeasures the lease liability for other reasons (for example, because
of a reassessment of the lease term) and when there is a change in the cash flows resulting from
a change in the reference index or rate (that is, when an adjustment to the lease payments takes
effect).
• Lessees should reassess the lease term only upon the occurrence of a significant event or a
significant change in circumstances that are within the control of the lessee.
• The right-of-use asset is depreciated over the shorter of the lease term and the useful life of the
right-of-use asset, unless there is a transfer of ownership or purchase option which is reasonably
certain to be exercised at the end of the lease term. If there is a transfer of ownership or purchase
option which is reasonably certain to be exercised at the end of the lease term, the lessee
depreciates the right-of-use asset over the useful life of the underlying asset.
• The lessee applies the impairment requirements in PSAK 48, ‘Impairment of assets’, to the right-of-
use asset.
PwC observation
The ability to gather the required information for existing leases and capture data for new leases
(e.g., renewal terms, discount rates, and embedded lease terms) will be critical to an effective
transition to the new standard. This may result in the need for new systems, controls and
processes, which will take time to identify, design, implement and test.

PSAK 73 - Leases
Lessee accounting model (cont’d)
Technology companies often sublease excess space. When a lessee subleases an asset, the lessee
(now a sub-lessor) should account for a head lease and sublease as two separate contracts unless the
sub-lessor is relieved of its primary obligation under the head lease. The sub-lessor should determine
the classification of the sublease based on the underlying asset in the head lease, rather than on the
sub-lessor’s rights-of-use.
PwC observation
Classification guidance requires treating a lease as a finance lease if it transfers all risks and
rewards incidental to ownership of the underlying the asset. Where the underlying asset is so
specialised that only the lessee can use it without major modifications, the sublease contract
would normally be classified as a finance lease. We do not expect that this indicator will have
a significant impact on lease classification for most technology companies. This is because, in
such cases, the lessor would likely have either (a) priced the lease such that the present value
of lease payments is substantially all of the fair value of the asset or (b) set the lease term to be
equal to a major part of the asset’s remaining economic life, causing the lease to be classified as
financing (capital) already.
Example 5 – Lessee model, initial and subsequent measurement

Facts: Technology Corp (“Lessee”) rents an office building from Landlord Corp (“Lessor”) that
qualifies as a lease. The following is a summary of information about the lease and the leased
asset.
Lease term Eight years with three three-year renewal options

Remaining economic life of the leased asset 25 years
Purchase option None
Annual lease payments C25,000
Payment date Annually on December 31
Initial direct costs CU10,000
Lessee’s incremental borrowing rate 6.00%
Other information
• The rate implicit in the lease that the Lessor charges the Lessee is not readily determinable
by the Lessee
• Title to the asset remains with the Lessor upon lease expiration
• The Lessee does not guarantee the residual value of the office building at the end of the
lease term
• The Lessee is responsible for maintaining the asset
• Exercise of the renewal option by the Lessee is not reasonably certain
Question1: How would the Lessee measure and record this lease at the lease commencement
date?

PSAK 73 - Leases
Lessee accounting model (cont’d)
Discussion: the Lessee should measure the lease liability by calculating the present value of the
unpaid annual fixed lease payments of C25,000 discounted at the Lessee’s incremental borrowing
rate of 6% (C155,245).
The rights-of use asset is the sum of the lease liability and the initial direct costs paid by the
Lessee, which is C165,245 (C155,245 + C10,000). Although not mentioned in this example, the
rights-of-use asset would be adjusted for any lease payments made to the Lessor on or before
the commencement date, and lease incentives received from the Lessor prior to the lease
commencement date.
Question: How would the Lessee subsequently measure the rights-of-use asset and lease liability
over the lease term?
Discussion: the Lessee would calculate the total lease cost equal to C25,000 rent payments per
year for eight years plus C10,000 initial direct costs (C210,000). The straight-line lease expense
recorded each period would be the total lease cost divided by the total number of periods which is
C26,250.
Interest expense on the lease liability would be calculated using a rate of 6%, the same discount
rate used to initially measure the lease liability. The lease liability would be amortised based on
the effective interest method and thus reduced by the principal component each year. The Lessee
would calculate the amortisation of the right-of-use asset in accordance with PSAK 16 over the
shorter of the lease term and the useful life of the right-of-use asset. In this example, the lease
term is shorter than the useful life of the right-of-use asset, therefore, it is amortised for eight years
using the straight-line method.
Lease Liability Right-of-use of Asset

Lease Right-of use
Payment Principal Interest Amortisation
Liability Asset
Commencement $10,000 - - $155,245 $165,245
Year 1 25,000 $15,685 $9,315 139,560 20,656 144,589
Year 2 25,000 16,626 8,374 122,934 20,656 123,933
Year 3 25,000 17,624 7,376 105,310 20,656 103,277
Year 4 25,000 18,681 6,319 86,629 20,656 82,621
Year 5 25,000 19,802 5,198 66,827 20,656 61,965
Year 6 25,000 20,990 4,010 45,837 20,656 41,309
Year 7 25,000 22,250 2,750 23,587 20,656 20,653
Year 8 25,000 23,587 1,413 - 20,653 -
$210,000 $155,245 $44,755 $165,245

PSAK 73 - Leases
Lease modification and

reassessment (lessee)
A lease modification is any change to the terms and conditions of a contract that results in a change
in the scope of the lease, or the consideration for the lease that was not part of the original terms and
conditions of the lease. Any change that is triggered by a clause that is already part of the original
lease contract (including changes due to a market rent review clause or the exercise of an extension
option) is not regarded as a modification.
A modification is accounted for as a contract separate from the original lease if the modification grants
the lessee an additional right of use not included in the original lease and the additional right of use is
priced consistent with its standalone value. When a modification is a separate lease, the accounting
for the original lease is unchanged and the new lease component(s) should be accounted for at
commencement like any other new lease.
In contrast, when a lease is modified and the modification is not recognised as a separate lease, the
lessee must remeasure and reallocate all of the remaining contract consideration from both lease and
non-lease components based on the modified contract and remeasure the lease liability and adjust the
rights-of-use asset using assumptions as of the effective date of the modification (e.g., discount rate
and remaining economic life).
PwC observation
For a reassessment of either the lease term or the likelihood of exercise of a purchase option,
the triggering event must be within the control of the lessee (if not, the event will not require a
reassessment). A change in market-based factors will not, in isolation, trigger a reassessment of the
lease term or the likelihood of the exercise of a purchase option. For example, a reassessment would
not be triggered if a lessee is leasing a server and hardware equipment and current market conditions
change such that lease payments that the lessee will be required to make in the extension period are
now considered below market. On the other hand, a lessee making significant investments in the data
centre with significant value beyond the initial lease term would require a reassessment to determine
whether this improvement results in renewal being considered reasonably certain.
It will be important for companies to have processes and controls in place to identify and monitor
triggering events that would require the reassessment of a lease.
Even when a lease is not modified, there are circumstances when a lessee will also be required to
remeasure the right-of-use asset and lease liability. The table below lists these circumstances and the
related impact on the lessee’s accounting.
Reallocate contract Update

consideration and discount
remeasure the lease rate
An event occurs that gives the lessee a significant economic
√ √
incentive to exercise/not exercise a renewal or termination option
An event occurs that gives the lessee a significant economic
√ √
incentive to exercise/not exercise a purchase option
A change in future lease payments occurs resulting from a
√
change in an index or a rate used to determine those payments
Amounts due under a residual value guarantee become
√
probable of being owed

PSAK 73 - Leases
Sale and leaseback

arrangements
Existing sale-leaseback guidance in PSAK 30 is replaced with a new model applicable to both lessees
and lessors. The accounting for sale and leaseback transactions under PSAK 30 mainly depended
on whether the leaseback was classified as a finance or an operating lease. Under PSAK 73, the
determining factor is whether the transfer of the asset qualifies as a sale in accordance with PSAK 72.
Technology companies should apply the requirements for determining when a performance obligation
is satisfied in PSAK 72, to make this assessment.
When the criteria are met, control has passed to the buyer-lessor and the buyer-lessor should
recognise a purchase of the asset applying the applicable PSAK and the lease applying the lessor
accounting. The seller-lessee should measure the right-of-use asset arising from the leaseback at the
proportion of the previous carrying amount of the asset that relates to the right of use retained by the
seller-lessee. Accordingly, the seller-lessee shall recognise only the amount of any gain or loss that
relates to the rights transferred to the buyer-lessor (adjusted for off-market terms).
If the transaction does not qualify as a sale, the seller-lessee would not derecognise the transferred
asset and would reflect the proceeds from the sale-leaseback transaction as a financial liability. The
buyer-lessor would reflect its cash payment as a financial asset accounted for in accordance with
PSAK 71.
The five indicators (not all-inclusive) included in the new revenue recognition standard to determine
whether a customer has obtained control of an asset are:
• The seller-lessee has a present right to payment
• The buyer-lessor has legal title
• The buyer-lessor has physical possession
• The buyer-lessor has the significant risks and rewards of ownership
• The buyer-lessor has accepted the asset.
PwC observation
Judgment will be required to determine whether the sale criteria in PSAK 72 have been met and
the conclusion will depend on the specific facts and circumstances of the transaction. Not all
of the indicators need to be met to conclude that control has transferred from the seller-lessee
to the buyer-lessor. In the revenue standard, sale recognition is precluded when the party that
would be the seller-lessee has a substantive repurchase right (a call option) or obligation (a
forward) with respect to the underlying asset.

PSAK 73 - Leases
Glossary
AFS Available for sale

Dewan Standar Akuntansi Keuangan – Ikatan Akuntan Indonesia or “Financial
DSAK-IAI
Accounting Standards Board – Indonesian Institute of Accountants”
ECL Expected credit loss
FOB Free on Board
FVPL Fair Value through Profit or Loss
FVOCI Fair Value through Other Comprehensive Income
IFAS Indonesian Financial Accounting Standards
IFRS International Financial Reporting Standards
IP Intellectual Property
Interpretasi Standar Akuntansi Keuangan or “Interpretation of Financial Accounting
ISAK
Standards”
OCI Other comprehensive income
Pernyataan Standar Akuntansi Keuangan or “Statement of Financial Accounting
PSAK
Standards”
SAK Standar Akuntansi Keuangan or “Financial Accounting Standards”
SPPI Solely Payments of Principal and Interest

PSAK 73 - Leases

PwC Indonesia contacts
For further help, please contact:
Jumadi Dariya Karasova

Partner Advisor
jumadi.anggana@id.pwc.com dariya.m.karasova@id.pwc.com
Djohan Pinnarwan Helen Cuizon

Partner Advisor
djohan.pinnarwan@id.pwc.com helen.cuizon@id.pwc.com
Irwan Lau Elina Mihardja

Partner Senior Manager
irwan.lau@id.pwc.com elina.mihardja@id.pwc.com
Eddy Rintis Gayatri Permatasari

Partner Manager
eddy.rintis@id.pwc.com gayatri.permatasari@id.pwc.com
PwC Indonesia
Jakarta Surabaya
WTC 3, Jl. Jend. Sudirman Kav. 29-31 Pakuwon Center
Jakarta 12920 Tunjungan Plaza 5, 22nd Floor, Unit 05
Indonesia Jl. Embong Malang No. 1, 3, 5
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Guidance Big 3 Standards Technology 1

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Guidance Big 3 Standards Technology 1

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Guidance on the

New Big-3 Standards

This publication reflects the implementation developments and provides guidance on

In 2017, the DSAK-IAI published the complete version

No changes were introduced for the classification

PSAK 71 also includes the new hedging guidance.

These changes are likely to have a significant impact on

PSAK 71 will be effective for annual periods beginning

PSAK 71 – Financial Instruments

Overview What to do now?

A snapshot of the financial position of a technology company

Current and non-current

Guidance to the New Big-3 Standards: Technology Sector 5

Classification and measurement –

Debt investments (including receivables)

Amortised cost FVOCI

Business model assessment

6 Guidance to the New Big-3 Standards: Technology Sector

Classification and measurement –

Contractual cash flows analysis Equity investments

Guidance to the New Big-3 Standards: Technology Sector 7

Classification and measurement –

What does this mean for the technology industry?

• Equity instruments are measured at fair value under all circumstances. An

• Derivatives remain classified at fair value through profit or loss.

• Monetary contingent consideration that the acquirer is due to pay or receive is

8 Guidance to the New Big-3 Standards: Technology Sector

Impairment of assets measured at

Change in credit quality since initial recognition

12-month ECL Lifetime ECL Lifetime ECL

Guidance to the New Big-3 Standards: Technology Sector 9

Impairment – Scope exception for

10 Guidance to the New Big-3 Standards: Technology Sector

Impairment – Scope exception for

• For trade receivables that contain a significant financing component, for

Guidance to the New Big-3 Standards: Technology Sector 11

How does a provision matrix work?

Total sales CU10,000

12 Guidance to the New Big-3 Standards: Technology Sector

Provision matrix (cont’d)

Sales payments Sales payments Sales payments

Guidance to the New Big-3 Standards: Technology Sector 13

Provision matrix (cont’d)

Sales payments Sales payments Sales payments

14 Guidance to the New Big-3 Standards: Technology Sector

Impairment of intra-group loans

What does this mean for technology industry?

Guidance to the New Big-3 Standards: Technology Sector 15

Cash advanced might not be fair

What does this mean for the technology industry?

16 Guidance to the New Big-3 Standards: Technology Sector

Simpli cation of hedge accounting, bringing it in line with an entity’s

Effectiveness testing is now more relaxed – No 80%-125%

Exposures permitted to be hedged have expanded. For example, risk

Net positions can now be hedged

What does this mean for technology industry?

Guidance to the New Big-3 Standards: Technology Sector 17

18 Guidance to the New Big-3 Standards: Technology Sector

This publication reflects the implementation

Implementation in the technology