2017 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE, member firms of the KPMG network of independent member firms affiliated with KPMG

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2 Contents Company name: ABC IFRS report: IFRS 15 diagnostic report Month: December 2017 Glossary of abbreviations 3 Background about the entire exercise and how to read the report 4 Disclaimers 5 IFRS 15 potential impact areas - Summary 6 IFRS 15 potential impact areas - Detail 8 2

3 Background about the exercise and how to read the report Background about the exercise The International Accounting Standards Board has issued a new accounting standard on revenue ( IFRS 15 Revenue from Contracts with Customers ) which is mandatory for the companies to comply when they prepare financial statements for annual periods beginning on or after 01 January 2018 (early application permitted). The new financial instruments standard: Replaces the following revenue guidance: IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfer of Assets to Customers, and SIC 31 Revenue-Barter Transactions Involving Advertising Services Introduces a five-step model that is likely to affect the way companies account for revenue Could impact the timing of revenue recognition; the profile of margin on contracts; contract negotiations with customers; debt covenants; and employee reward schemes In order to assess the potential impact areas under IFRS 15, the company has used the KPMG IFRS Health Check, a simple online self-diagnostic tool and received this diagnostic report based on the responses provided to the online assessment. How to read the report a) IFRS 15 potential impact areas Summary b) IFRS 15 potential impact areas Detail 4

4 IFRS 15 potential impact areas Summary S.No Topic Sub-topic Applicable for you Potential impact 1 Scope 2 Step 1: Identify the contract with a customer Existence of a contract Term of the contract Combination of contracts 3 Step 2: Identification of performance obligations in the contract 4 Step 3: Determination of transaction price Variable consideration (and the constraint) Significant financing component Noncash consideration Consideration payable to a customer 5 Step 4: Allocation of the transaction price to the performance obligations in the contract Estimation and allocation of stand-alone selling prices Allocation of discount to performance obligations Allocation of variable consideration to performance obligations 6 Step 5: Recognise revenue when or as the entity satisfies a performance obligation Performance obligations satisfied over time Method to measure progress for revenue recognition over time Performance obligation satisfied at a point in time Repurchase agreements Consignment arrangements Bill-and-hold arrangements Customer acceptance 7 Contract costs Costs of obtaining a contract Costs of obtaining a contract Amortisation Impairment 8 Contract modifications Identification of contract modifications Accounting for contract modifications 9 Licensing Sale of intellectual property (IP) 10 Sales outside ordinary activities License of intellectual property (IP) - Distinct from other goods or services License of intellectual property (IP) - Timing and pattern of revenue recognition 11 Other issues Sale with a right of return Warranties Principal vs agent Customer options for additional goods or services Customer loyalty programs Customers' unexercised rights (breakage) Non-refundable upfront fees Onerous contract 6

5 IFRS 15 potential impact areas Detail S.No Topic Sub-topic Key changes under IFRS 15 Applicable for you 1 Scope The new standard applies to contracts to deliver goods or services to a customer. Its guidance applies to contracts with customers in all industries. However, a contract with a customer is outside the scope of the new standard if it comes under the scope of other specific requirements. In some cases, the new standard will be applied to part of a contract or, in certain circumstances, to a portfolio of contracts. - Similar scope despite some differences in explicit exemptions IAS 18 includes specific scope exceptions relating to changes in the fair value of biological assets, the initial recognition of agricultural produce, the extraction of mineral ores, and changes in the value of other current assets. The new standard does not explicitly include these scope exemptions, but because these items do not arise from contracts with customers they are also out of the scope of the new standard. - Guidance on dividends moved to financial instruments standard The new standard does not include guidance on the accounting for dividend income. Instead, guidance that is consistent with existing requirements has been incorporated into the financial instruments standards. Potential impact Key reasons The entity has some revenue-generating contracts (e.g. collaboration agreement, market sharing agreement, production sharing agreement, etc.) which may not qualify as a contract with a customer for IFRS 15 (out of scope of IFRS 15). The alternative revenue program with the regulator will continue to be accounted for under the applicable existing standards (IFRS 15 will be applied by the rate-regulated entities to their ordinary sales activities). 2 Step 1: Identify the contract with a customer Existence of a contract A contract with a customer is in the scope of the new standard when the contract meets the following criteria: - legally enforceable - collection of consideration is probable - rights to goods or services and payment terms can be identified - has commercial substance; and - is approved and the parties are committed to their obligations If the criteria are not met, the contract is not in the scope of the new standard and any consideration received from the customer is generally recognised as a liability. The entity delivers goods or services to customers under the expired contract (till the new contract is finalised) which may not be legally enforceable (may preclude revenue recognition). The entity has contracts with customers who have deteriorated in their creditworthiness (e.g. bankrupt, defaulted dues, etc.) and hence collection of consideration may not be probable (may preclude revenue recognition and for ongoing contracts, revenue recognition may be discontinued with no reversal of revenue recognised previously). The definition of a contract in the new standard focuses on legal enforceability. Term of the contract The new standard is applied to the duration of the contract (i.e. the contractual period) in which the parties to the contract have presently enforceable rights and obligations. The determination of the contract term is important because it may affect the measurement and allocation of the transaction price, the collectability assessment, the timing of revenue recognition for up-front nonrefundable fees, contract modifications, and the identification of material rights. The entity has contracts with customers that can be terminated before the stated duration resulting in the contract term shorter than the stated duration under the contract (may affect different parts of IFRS 15 - measurement, allocation, timing of revenue recognition for non-refundable upfront fees, identification of material rights, etc.). Combination of contracts Contracts entered into at or near the same time with the same customer (or a related party of the customer) are combined and treated as a single contract when certain criteria are met. The new standard requires contracts to be combined (mandatory) when certain criteria are met unlike the current standards (IAS 11 or IAS 18) which require the entity only to consider for combination. 8

6 S.No Topic Sub-topic Key changes under IFRS 15 Applicable for you Potential impact Key reasons 11 Other issues Sale with a right of return Warranties An entity applies the accounting guidance for a sale with a right of return when a customer has a right to: a full or partial refund of any consideration paid; a credit that can be applied against amounts owed, or that will be owed, to the entity; or another product in exchange (unless it is another product of the same type, quality, condition, and price such as exchanging a red sweater for a white sweater). In addition to product returns, the guidance also applies to services that are provided subject to a refund. The guidance does not apply to: exchanges by customers of one product for another of the same type, quality, condition, and price; and returns of faulty goods or replacements, which are instead evaluated under the guidance on warranties - Net presentation no longer permitted Under the new standard, the refund liability is presented gross as a refund liability and an asset for recovery. This will be a change in practice for entities that currently present reserves or allowances for returns net. Under the new standard, an entity accounts for a warranty or part of a warranty as a performance obligation if: - the customer has an option to purchase the warranty separately; or - additional services are provided as part of the warranty. Otherwise, warranties will continue to be accounted for under the existing guidance (IAS 37). - Presence of warranty clause does not preclude recognition of revenue Under IAS 18, a standard warranty clause in a sales contract that does not result in the seller retaining significant risks does not preclude revenue recognition at the date of sale of the product. In this case, the entity recognises a warranty provision under IAS 37 at the date of sale, for the best estimate of the costs to be incurred for repairing or replacing the defective products. However, an abnormal warranty obligation could indicate that the significant risks and rewards of ownership have not been passed to the buyer, and that revenue should therefore be deferred. Unlike current IFRS, the new standard does not envisage that the presence of a warranty would ever preclude the recognition of all of the revenue associated with the sale. This could accelerate revenue recognition in some cases. The entity provides customer a right to return the good or service and hence needs to evaluate the appropriate guidance to apply (right of return vs. warranty) under the new revenue standard. The entity replaces the good or service returned by the customer for refund of cash or credit or exchange with a different product (e.g. exchange of a red sweater for a white sweater) and hence the guidance on 'sale with a right of return' will become relevant instead of the guidance on 'warranty' under IFRS

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