How will the new revenue standard impact future business combinations?

In previous editions of Accounting Alert we highlighted that the new ‘triple threat’ accounting standards (IFRS 9, 15 and 16) have application issues beyond just their own transition impacts. Our  May 2019 edition focussed on the impacts of these three new standards for business combinations occurring prior to the effective dates of these three standards, and our  June 2019 edition focussed on the impacts for business combinations occurring after the effective dates. This month we continue our discussion of the IFRS 15 impacts on business combinations post the effective dates. We provide a more detailed example where the acquired business has completed contracts (i.e. all performance obligations have been fully satisfied), with variable consideration outstanding at acquisition date.

September 2019 means that most groups would by now have completed, for all group entities, their transition assessments for the impacts of the new revenue standard, IFRS 15 Revenue from Contracts with Customers. However, this is not an excuse to become complacent. IFRS 15 will need to continually be revisited as contracts are modified, and promises to provide goods and services change.

In addition, when entities acquire new businesses, IFRS 15 may not impact the acquiree company and the group in the same way, and in many cases this will require two sets of books (one for the acquiree company and one for pro forma consolidation adjustments) to be maintained on an ongoing basis.

Example – Acquired contracts with satisfied performance obligations

Big Co acquires Small Co on 1 July 2019.

Small Co has a contract to develop a website for a customer that falls in the scope of IFRS 15.

Revenue for the contract is as follows:

  • Web site development - $10,000
  • Additional revenue based on the number of website visits over the next five years ($1 per visit, estimated 15,000 visits - $15,000 ignoring the impact of discounting).
Entries in Small Co books

Small Co completed the web site and delivers it to the customer on 30 June 2019. No other deliverables are outstanding and Small Co has satisfied its performance obligation. It recognises revenue on 30 June 2019 as follows:

Cash/receivable 10,000  
Revenue   10,000

Small Co treats the remaining revenue based on the number of web site visits as variable consideration under IFRS 15, paragraph 56, due to the transaction price being constrained. For simplicity, in this example, Small Co constrains the variable consideration to Nil, but in practice, some value would usually be associated with the variable consideration, and Small Co would recognise revenue on 30 June 2019 at an amount greater than the fixed consideration of $10,000.

Therefore, despite the fact that Small Co has satisfied all the performance obligations identified in the contract, variable consideration is only recognised as revenue as and when the website receives visits over the five-year period i.e. when the uncertainty associated with the variable consideration is subsequently resolved.  

Entries on consolidation

When Big Co acquires Small Co on 1 July 2019, it accounts for the contract acquired using IFRS 3 Business Combinations. This would include measuring the outstanding IFRS 15 performance obligations at their fair value, however, no such performance obligations exist because Small Co delivered the completed web site prior to the date of the business combination on 30 June 2019.

As the cash flows do not require Big Co to provide any future goods or services, from the perspective of the acquirer, the contract is not a contract with a customer in the scope of IFRS 15.

In substance, Big Co has acquired a stream of future cash flows that will vary depending on website traffic, with no obligation to perform any activities associated with the contract.

What type of asset has Big Co acquired?

A question then arises as to what type of asset has been acquired by the Big Co group. 

Type of asset Answer Reasons
Trade receivable? No A receivable is an entity’s right to consideration that is unconditional under IFRS 15. The arrangement is not a ‘contract with a customer’ and therefore not within the scope of IFRS 15.
Contract asset? No The arrangement is not a ‘contract with a customer’ and therefore not within the scope of IFRS 15.
Financial asset? Yes Stream of future cash flows to be received on web site visits represents a contractual right to receive cash from another entity.

At the time of the acquisition on 1 July 2019, Big Co must measure a financial asset relating to the stream of future cash flows that are expected to be received. This may be achieved by determining a best estimate of the cash flows to be received and applying an appropriate discount rate.

What type of financial asset?

To subsequently measure the asset acquired by Big Co in the business combination, Big Co considers the classification of the financial asset it received.

Classification of financial asset as being… Answer Reasons
Amortised cost No Fails SPPI test (contractual cash flows of principal and interest) because cash flows vary depending on the next five years of website traffic.
Equity instrument No Not a residual interest
Fair value through profit or loss (FVTPL) Yes Default category since the financial asset is neither of the above.
Subsequently measure at FVTPL for financial assets.
Movements in FVTPL are not classified as ‘revenue’ under IFRS 15.


As a result of the above analysis, post combination (1 July 2019), a significant amount of reconciliation work is required between Small Co’s books and the consolidated financial statements prepared by the Big Co Group:

  • Small Co will continue to recognise top line revenue under IFRS 15 for the variable consideration earned as a result of web site visits
  • Big Co Group will recognise no revenue for the variable consideration as a result of the web site visits. Instead, it will only recognise fair value movements in the financial asset in profit or loss as ‘other income’, and
  • Big Co Group will continue to recognise a financial asset at FVTPL until the contract for variable consideration expires.

For illustrative purposes, we have ignored the impact of discounting but in practice, this will need to occur. The following additional information is relevant:

  • For the year ended 30 June 2020, Small Co earns $3,000 variable consideration due to 3,000 web site visits
  • Small Co now estimates there will only be a further 10,000 visits to the web site, therefore the fair value of the financial asset of Big Co Group on 30 June 2020 is $10,000.

Extracts of the balance sheet and profit or loss statement of Small Co and Big Co Group on 1 July 2019 (acquisition date) and post business combination are shown below: 

  Small Co
Big Co Group
1 July 2019 – Balance sheet
Financial asset at FVTPL - 15,000
30 June 2020 – Profit or loss
Revenue 3,000 -
Fair value movement on financial asset at FVTPL - (2,000)
30 June 2020 – Balance sheet
Financial asset at FVTPL - 10,000