IFRS 15 outlines how and when an IFRS reporter would recognise revenue and requires such companies to make more meaningful, relevant disclosures to readers of financial statements.
The standard offers a single, five-step model based on a set of guiding principles for all client contracts.
Objective
The purpose of IFRS 15 is to establish the requirements that a company must meet for useful information about the type, amount, timing, and uncertainty of revenue or cash flows directly or indirectly attributable to an existing contract with a customer to be obtained.
The adoption of this standard is obligatory for annual reporting periods starting from January 1, 2018. Early adoption is permitted.
Scope
IFRS 15 Revenue from Contracts with Customers applies to all customer contracts except leases under IAS 17 Leases, financial instruments and other contractual rights or obligations under IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures, and insurance contracts under IFRS 4 Insurance.
A contract with a customer may be partially within the scope of IFRS 15 and partially within the scope of another standard.
Other standards apply first if they specify how to divide and/or measure contract elements. The transaction price is then reduced by amounts initially measured under other standards; if no other standard provides guidance, IFRS 15 is applied.
Accounting requirements for revenue
The five-step model framework
IFRS 15 is the International Financial Reporting Standard for revenue recognition, which provides a framework for companies to recognise revenue from contracts with customers. The five-step model framework under IFRS 15 is as follows:
Identify the contract with the customer: The first step is to identify whether a contract exists. A contract is an agreement between two or more parties that creates enforceable rights and obligations.
Identify the performance obligations: Once a contract is identified, the next step is to identify the performance obligations in the contract. Performance obligations are promises to transfer goods or services to a customer.
Determine the transaction price: The transaction price is the consideration a company expects to receive in exchange for transferring goods or services to a customer. The transaction price may be fixed or variable, depending on the contract terms.
Allocate the transaction price to the performance obligations: Once the transaction price is determined, the next step is to allocate the transaction price to each performance obligation in the contract. This involves estimating the standalone selling price of each performance obligation and allocating the transaction price based on the relative standalone selling prices.
Recognise revenue as performance obligations are satisfied: The revenue is recognised in conjunction with the satisfaction, or transfer of control, of each performance obligation, which could be over time, for example, in the construction industry, or at a point in time, for example, in the sales of goods.
The five-step framework under IFRS 15 is designed to provide a comprehensive approach to revenue recognition, ensuring that revenue is recognised when the company satisfies its performance obligations and that the amount recognised reflects the consideration to which the company is entitled.
Presentation in financial statements
Contracts with customers will be presented as a contract liability, a contract asset, or a receivable in an entity’s statement of financial position, depending on the nature of its performance and the customer’s payment. A contract liability is recognised in the statement of financial position when a client has paid a significant amount before the transfer of the related good or service.
The statement of financial position presents the contract assets or receivables when an entity has transferred an asset or rendered a service to the customer, and the customer has not paid the consideration due. A contract asset is recorded if the entity’s right to consideration depends on anything other than the passage of time. When an entity has a right to payment that is unconditional, the receipt is issued over time.
IFRS 9 will account for the contract assets and receivables. Impairment related to contracts with customers should be presented and disclosed measured presentation. The difference between the initial recognition of a receivable and the corresponding amount of revenue recognised should also be presented as an expense, for example, an impairment loss.
Disclosures
The disclosure objective stated in IFRS 15 is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Therefore, an entity should disclose qualitative and quantitative information about all of the following: [IFRS 15:110]
- its contracts with customers;
- the significant judgments, and changes in the judgments, made in applying the guidance to those contracts; and
- any assets recognised from the costs to obtain or fulfil a contract with a customer.
Entities must decide how much information to provide to meet the disclosure aim. Aggregate or disaggregate releases to avoid obscuring vital information. The Standard includes additional disclosure criteria to meet the stated goal.
