article banner

Accounting for change: How COVID-19 affects TFRS 15

By all accounts, Thailand has emerged relatively unscathed by the worst of the COVID-19 pandemic. Experts remain somewhat baffled as to why this is the case, but surely a strong healthcare system, an effective mobilisation of healthcare workers, and high levels of cooperation from the public were all significant factors. 

Thailand was also recently named the second-best country to invest in by the World Bank Group. Despite these auspicious signs, however, the country’s short-term economic prospects remain rather bleak. Even though the rate of infection remained low throughout the last few months, businesses across all sectors were heavily impacted by the coronavirus.

While most companies have now resumed normal operations, it will still take some time before Thailand’s economy can fully recover. In the near term, economic uncertainty is likely to continue affecting the revenue that businesses earn through contracts with customers.

The entities that apply TFRS 15 “Revenue from Contracts with Customers” in the preparation of financial statements will have to be diligent to avoid non-compliances and legal complications arising from COVID-19-related accounting and disclosures.

TFRS 15 implications for financial reporting   

TFRS 15 is based on a core principle that requires an entity to recognise revenue in a manner that depicts the transfer of goods or services to customers at an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. Applying this principle involves following the ‘5-step model’.

In the current economic climate, entities may enter into contracts with customers who has a high risk of non-payment. If collecting the consideration is not probable at the contract’s inception, the normal TFRS 15 guidance does not apply. Instead, the supplier recognises revenue only if/when it collects the consideration and has no remaining obligations to perform. In effect, the entity should cash account for transactions of this nature. Generally, once a contract meets the conditions to apply the normal TFRS 15 model, any deterioration in the customer’s ability to pay is accounted for under the expected credit loss model set out in TFRS 9 ‘Financial Instruments’. However, if the customer’s ability to pay deteriorates significantly while the contract is still in progress, the entity should reassess whether collection is probable.

One of the steps in 5-step model is “Determine the transaction price”. The transaction price can be a fixed amount of customer consideration, but it may sometimes include variable consideration in a form other than cash.

Paragraph 15.59 requires entities and their managers to reassess variable consideration at the end of each reporting period – whether interim or year-end. This is to ensure that the variable consideration estimate, as well as any constraints therein, depicts the conditions that exist at the reporting date. COVID-19 and the ensuing government-imposed lockdown may have altered facts and circumstances. The entity’s ability to perform may have thus been hindered and customers may have been unable to pay the expected amounts. In these cases, the amount of consideration to which the entity expects to be entitled may have been affected. The entities and their managers are therefore required to reassess their estimates of variable consideration in contracts with customers.

Thus, management must refer to TFRS 15 carefully when preparing financial statements. Paragraphs 15.59, 15.53, 15.56, and 15.85 are of particular importance in instances where the entities have existing contracts with customers which are partially completed or will be completed in the near future. Variable consideration estimates depend on employing the appropriate estimation method (expected value or most likely amount) and must be completed in accordance with Paragraph 15.53.

If current estimates differ from previous estimates, the transaction price should be amended, as per the constraint in Paragraph 15.56. However, this constraint only applies if it is highly improbable that a significant reversal in the amount of cumulative revenue recognised will occur when the uncertainty is resolved. If the transaction price is reduced, the estimate change may lead to a reversal of the cumulative revenue recognised.

Paragraph 15.85 may also become relevant. In some cases, the effects of the estimate change only need to be allocated to a single performance obligation, or as part thereof, rather than affecting the transaction price allocated to all performance obligations.  

For example:

Engineering Co, having 31 December as year-end, entered into a contract with Customer Co. in May 2019 involving the production of ten packaging machines. Customer Co. agreed to pay Engineering Co. Baht 100,000 upon delivery of each packaging machine, with a bonus of Baht 200,000 if all packaging machines are delivered by 30 June 2020. As of 31 December 2019, eight packaging machines had been delivered, with the ninth nearing completion and the tenth on schedule for delivery on 31 May 2020. On 31 March 2020, Engineering Co. ceased construction due to social distancing rules, but was able to deliver the ninth packaging machine. Assume no contractual ability to terminate under force majeure. Assume also that point-in-time revenue recognition is appropriate.

As of 31 December 2019, Engineering Co. recognised the following revenue:

Delivery of 8 packaging machines (Baht 100,000 x 8)

Baht 800,000

Share of bonus (Baht 200,000 x 8/10)

Baht 160,000

Total revenue recognised

Baht 960,000

It was appropriate to recognise the share of performance bonus on 31 December 2019, because at that date it was “highly probable that a significant reversal in the amount of cumulative revenue will not occur when the uncertainty associated is subsequently resolved” (TFRS 15.56). Note that the hurdle is “highly probable” not “certain” – it was reasonable, on 31 December 2019, to not have anticipated a pandemic.

For the half-year ending on 30 June 2020, it is apparent that the performance bonus will not be received. As of 31 March 2020, the aggregate amount of revenue to be recognised is:

Delivery of 9 packaging machines (Baht 100,000 x 9)

Baht 900,000

Share of performance bonus – Total revenue recognised


Total revenue recognised

Baht 900,000

This results in a required reduction of Baht 40,000 in revenue recognised.

Other areas within TFRS 15

Besides variable consideration, there are a number of other areas that can be impacted due to ongoing COVID-19-related disruptions. These include:

  1. Contract modifications
  2. Recoverability and extended payment terms
  3. Customer incentives
  4. Onerous contracts
  5. Disclosures

Keeping yourself protected

By carefully considering the implications of TFRS 15, entities can ensure the accuracy and compliance of their financial reporting for revenues generated from contracts with customers throughout these uncertain economic times.

If your entity complies with TFRS 15 and you have any uncertainty as to how you should proceed with your financial reporting, Grant Thornton’s audit team can guide you through the process. We have a deep and detailed understand of Thai Financial Reporting Standards, and we will make sure you satisfy regulators and shareholders alike.