IFRS 15 – Revenue from Contracts with Customers

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 objective of IFRS 15 is to set the standards that a business must follow in order to provide valuable information to consumers of financial statements about the type, amount, timing, and uncertainty of revenue and cash flows emanating from a contract with a client.

Application of the standard is required for annual reporting periods commencing on or after 1 January 2018. Application in advance is acceptable.

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 recognize 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.

Recognize revenue as performance obligations are satisfied: Revenue is recognized as each performance obligation is satisfied, or when control of the goods or services is transferred to the customer. This may occur over time, such as with long-term construction contracts, or at a point in time, such as with the sale of goods.

The five-step model framework under IFRS 15 is designed to provide a comprehensive approach to revenue recognition, ensuring that revenue is recognized when the company satisfies its performance obligations and that the amount recognized reflects the consideration to which the company is entitled.

Presentation in financial statements

Contracts with customers will be displayed as a contract liability, a contract asset, or a receivable on an entity’s statement of financial position, depending on the relationship between the entity’s performance and the customer’s payment. A contract liability is recorded in the statement of financial position when a client has paid a considerable amount prior to the transfer of the linked good or service.

Contract assets or receivables are displayed in the statement of financial position when a business has transferred an item or service to a client. Still, the customer has not yet paid the required consideration. A contract asset is recognised when an entity’s entitlement to consideration is based on something other than time, such as future performance. When an entity’s right to payment is unconditional, a receipt is issued time-wise.

Contract assets and receivables shall be accounted for by IFRS 9. Any impairment relating to contracts with customers should be measured, presented, and disclosed according to toy 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. [IFRS 15:107-108]

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.