IFRS 15, para 79, proposed use of cost plus margin basis for allocation of transaction price

Hyundai Motor Company – Annual report – 31 December 2017

Industry: automotive


2) New and revised standards that have been issued but are not yet effective as of the authorization date for issue of financial statements, and that have not been applied earlier by the Group are as follows: (extract)

– K-IFRS 1115 (Enactment): ‘Revenue from Contracts with Customers’

The core principle under K-IFRS 1115 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard introduces a 5-step approach to revenue recognition and measurement: 1) Identify the contract with a customer, 2) Identify the performance obligations in the contract, 3) Determine the transaction price, 4) Allocate the transaction price to the performance obligations in the contract, 5) Recognize revenue when (or as) the entity satisfies a performance obligation. This standard will supersede K-IFRS 1011 – Construction Contracts, K-IFRS 1018 – Revenue, K-IFRS 2113 – Customer Loyalty Programmes, K-IFRS 2115 – Agreements for the Construction of Real Estate, K-IFRS 2118 – Transfers of Assets from Customers, and K-IFRS 2031 – Revenue-Barter Transactions Involving Advertising Services.

The Enactments are effective for annual periods beginning on or after January 1, 2018. Under this transition method, the Group will apply this standard retrospectively with the cumulative effect of initially applying this Standard recognised at January 1, 2018, only to contracts that are not completed contracts at the date of initial application.

The Group has finalized analysis for assessing financial impact of adoption of K-IFRS 1115 based on the information available at the end of current period. The expected financial impact of the new standard on the consolidated financial statements are as follows:

A. Identify the performance obligations in the contract

The Group manufactures and distributes motor vehicles, trains and parts, and operates vehicle financing and credit card processing. In 2017, vehicle operating segment sales were ₩74,490,230 million which is approximately 77% of the Group’s total sales.

Upon application of K-IFRS 1115, the Group identifies the performance obligation in the contract with customers which are (1) Vehicle sales, (2) Additional service, (3) Additional warranty and (4) Other services. Timing of the revenue recognition may change depending on when the performance obligation is satisfied, either at a point in time or over time.

B. Allocation of the transaction price

Upon application of K-IFRS 1115, the Group allocates the transaction price of multiple performance obligation identified in one contract based on relative standalone selling price. The Group plans to use an expected cost plus margin approach by estimating the expected costs for each transaction and adding an appropriate profit margin.

C. Variable consideration

Upon application of K-IFRS 1115, the Group estimates the amount of consideration depending on which method the entity expects to better predict the amount of consideration to which it will be entitled—the expected value or the most likely amount. Variable consideration is included in the transaction price only to the extent that it is probable or highly probable that a significant reversal in the cumulative amount of revenue recognized will not occur in the future periods.

As of January 1, 2018, the effect of adjustments on retained earnings as a result of the retrospective application of K-IFRS 1115 for contracts that are not completed is not expected to be significant on consolidated financial statements.