IFRS 15: Revenue Recognition

• IFRS 15 establishes a comprehensive framework for revenue recognition
• This framework specifies how and when revenue should be recognized, providing a structured approach for companies
• IFRS 15 applies to all contracts with customers, except for leases, insurance contracts, and financial instruments

Core Principle

• Revenue recognition should depict the transfer of promised goods or services to customers
• The transfer should reflect the amount the entity expects to receive in exchange for those goods or services

Five-Step Model

• IFRS 15 outlines a five-step model for revenue recognition:
  • Identify the contract with a customer
  • Identify the performance obligations in the contract
  • Determine the transaction price
  • Allocate the transaction price to the performance obligations
  • Recognize revenue when (or as) the entity satisfies a performance obligation

Step 1: Identify the Contract with a Customer

• A contract is an agreement between two or more parties that creates enforceable rights and obligations
• Contracts can be written, oral, or implied by customary business practices
• A contract exists if:
  • The parties have approved the contract and are committed to performing their obligations
  • The entity can identify each party's rights regarding the goods or services to be transferred
  • The entity can identify the payment terms for the goods or services to be transferred
  • The contract has commercial substance (i.e., the risk, timing, or amount of the entity's future cash flows is expected to change as a result of the contract)
  • It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services

Step 2: Identify the Performance Obligations

• Performance obligations are promises in a contract to transfer goods or services to a customer
• A good or service is distinct if both of the following criteria are met:
  • The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer
  • The entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract
• A series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer can be treated as a single performance obligation

Step 3: Determine the Transaction Price

• The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer
• It can be a fixed amount, variable amount, or a combination of both
• Variable consideration:
  • If the consideration promised in a contract includes a variable amount, an entity shall estimate the amount of consideration to which it will be entitled in exchange for transferring the promised goods or services to a customer
  • An entity shall include in the transaction price some or all of an amount of variable consideration only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved
• Constraining estimates of variable consideration:
  • Factors that could increase the likelihood or magnitude of a revenue reversal include:
    • The amount of consideration is highly susceptible to factors outside the entity’s influence, such as market volatility, third-party actions, weather conditions, and obsolescence risk
    • The uncertainty about the amount of consideration is not expected to be resolved for a long time
    • The entity’s experience (or other evidence) with similar types of contracts is limited
    • The entity has a practice either of offering a broad range of price concessions or of changing the payment terms and conditions of similar contracts
    • The contract has a large number and broad range of possible consideration amounts
• Noncash consideration:
  • If a customer contributes equipment, materials, labour, or other items or services that facilitate the entity’s fulfilment of the contract, the entity shall measure the noncash consideration at fair value
• Consideration payable to a customer:
  • Consideration payable to a customer includes cash amounts that an entity pays, or expects to pay, to the customer (or to other parties that purchase goods or services from the customer)
  • An entity shall account for consideration payable to a customer as a reduction of the transaction price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to the entity

Step 4: Allocate the Transaction Price

• Allocate the transaction price to each performance obligation in proportion to the relative standalone selling prices of the distinct goods or services underlying each performance obligation
• Standalone selling price is the price at which an entity would sell a promised good or service separately to a customer
• If a standalone selling price is not directly observable, the entity should estimate it
• Approaches for estimating standalone selling price include:
  • Adjusted market assessment approach (evaluating the market)
  • Expected cost plus a margin approach
  • Residual approach
• Allocation of a discount:
  • An entity shall allocate a discount to one or more, but not all, of the performance obligations in the contract if all of the following criteria are met:
    • The entity regularly sells each distinct good or service (or each bundle of distinct goods or services) in the contract on a standalone basis
    • The entity also regularly sells on a standalone basis a bundle (or bundles) of some of those distinct goods or services at a discount compared with the prices for the goods or services when sold separately
    • The discount attributable to the bundle(s) of distinct goods or services is substantially the same as the discount in the contract
• Allocation of variable consideration:
  • When a contract has multiple performance obligations, a concern arises as to whether variable consideration should be allocated entirely to one or more performance obligations, or whether it should be allocated to the entire contract
  • An entity shall allocate a variable amount (and subsequent changes to that amount) entirely to one or more, but not all, of the performance obligations in a contract if both of the following criteria are met:
    • The terms of the variable payment relate specifically to the entity’s efforts to satisfy the performance obligation(s)
    • Allocating the variable amount of consideration entirely to the performance obligation(s) is consistent with the allocation objective when considering all of the performance obligations and payment terms in the contract

Step 5: Recognize Revenue

• Recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service to the customer
• A performance obligation is satisfied when the customer obtains control of the good or service
• Control is the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset or service
• Revenue is recognised either:
  • Over time
  • At a point in time
• Transfer of control over time:
  • An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met:
    • The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs
    • The entity’s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced
    • The entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date
• If a performance obligation is not satisfied over time, it is satisfied at a point in time
• Indicators of the transfer of control:
  • The entity has a present right to payment for the asset
  • The customer has legal title to the asset
  • The entity has transferred physical possession of the asset
  • The customer has significant risks and rewards of ownership of the asset
  • The customer has accepted the asset

Contract Costs

• Incremental costs of obtaining a contract:
  • An entity shall recognise as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs
  • Incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, a sales commission)
• Costs to fulfil a contract:
  • If the costs are not within the scope of another Standard (for example, IAS 2 Inventories or IAS 16 Property, Plant and Equipment), an entity shall recognise as an asset the costs incurred to fulfil a contract with a customer if those costs meet all of the following criteria:
    • The costs relate directly to a contract or to an anticipated contract that the entity can specifically identify
    • The costs generate or enhance resources of the entity that will be used in satisfying (or in continuing to satisfy) performance obligations in the future
    • The costs are expected to be recovered

Presentation

• An entity shall present contracts with customers in its statement of financial position as:
  • a contract asset, if the entity has performed by transferring goods or services to a customer and the customer has not yet paid the consideration
  • a contract liability, if the customer has paid consideration or the entity has a right to an amount of consideration that is unconditional (i.e., a receivable) before the entity transfers a good or service to the customer

Disclosure

• An entity shall 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
• An entity shall disclose the following:
  • Disaggregation of revenue
  • Information about contract balances
  • Performance obligations
  • Significant judgements

Understand IFRS 15's framework for revenue recognition. Learn how companies should recognize revenue and its application to customer contracts, excluding leases, insurance, and some financial instruments. Explore the core principle and the five-step model.