The International Financial Reporting Standards (IFRS) 15, Revenue from Contracts with Customers, was issued by the International Accounting Standards Board (IASB) in May 2014. It establishes a single, comprehensive revenue recognition model for all contracts with customers to enhance comparability within industries, across industries, and across capital markets. The standard supersedes IAS 18, Revenue, IAS 11, Construction Contracts, and related interpretations.
IFRS 15 is applicable for annual reporting periods commencing on or after 1 January 2018, with earlier adoption permitted. The fundamental principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard applies to all contracts with customers, excluding leases, financial instruments, insurance contracts, and certain non-monetary exchanges between entities in the same line of business to facilitate sales to customers.
IFRS 15 provides a five-step model to determine when and how revenue is recognised. These steps comprise identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognising revenue when (or as) the entity satisfies a performance obligation. The standard also includes specific guidance on various topics such as principal versus agent considerations, licences, and customer options for additional goods or services.
Summary
- IFRS 15 is the new standard for revenue recognition and applies to all entities that enter into contracts with customers.
- The key principles of IFRS 15 include identifying the contract, identifying the performance obligations, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when the performance obligations are satisfied.
- Revenue is recognized when control of the goods or services is transferred to the customer, either over time or at a point in time, depending on the nature of the performance obligations.
- The measurement of revenue under IFRS 15 involves estimating variable consideration, constraining the amount of variable consideration, and considering the time value of money when necessary.
- Disclosure requirements under IFRS 15 include providing information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
- The transition to IFRS 15 requires retrospective application, with some practical expedients available, and may have a significant impact on financial statements and key performance indicators.
- The impact of IFRS 15 on different industries varies, with industries such as telecommunications, software, and construction experiencing significant changes in revenue recognition practices.
Key principles of IFRS 15
The key principles of IFRS 15 revolve around the five-step model for recognizing revenue from contracts with customers. The first step is to identify the contract with the customer, which requires an entity to assess whether the contract creates enforceable rights and obligations between the parties. This step also includes determining whether the contract has commercial substance and whether it is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services transferred to the customer.
The second step is to identify the performance obligations in the contract, which are promises to transfer goods or services to a customer. A performance obligation is distinct if the customer can benefit from the good or service on its own or together with other resources that are readily available to the customer. The third step is to determine the transaction price, which is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer.
This step involves estimating variable consideration and considering the time value of money if the contract includes a significant financing component. The fourth step is to allocate the transaction price to the performance obligations in the contract, which requires an entity to allocate the transaction price on a relative standalone selling price basis. If a standalone selling price is not observable, an entity must estimate it.
The final step is to recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer. This may occur over time or at a point in time, depending on when control of the good or service is transferred to the customer.
Recognition of revenue under IFRS 15
Under IFRS 15, revenue is recognized when (or as) an entity satisfies a performance obligation by transferring a promised good or service to a customer. This may occur over time or at a point in time, depending on when control of the good or service is transferred to the customer. If control is transferred over time, revenue is recognized over time by measuring progress towards complete satisfaction of the performance obligation.
This measurement can be based on output methods (e.g., surveys of work performed) or input methods (e.g., costs incurred). If control is transferred at a point in time, revenue is recognized at that point in time. Control is transferred when the customer has both present right to obtain substantially all of the remaining benefits from the asset and has assumed the risks associated with those benefits.
In some cases, control may be transferred before physical delivery of the good or service occurs. For example, revenue from a license of intellectual property may be recognized at a point in time if the customer can use and benefit from the license immediately upon delivery.
Measurement of revenue under IFRS 15
The measurement of revenue under IFRS 15 involves determining the transaction price, which is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The transaction price may include fixed amounts, variable amounts, or both. Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
The transaction price may also include consideration payable to a customer, such as discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, and other similar items. Consideration payable to a customer reduces the transaction price unless it is in exchange for distinct goods or services from the customer. The transaction price may also include consideration payable by an entity to a customer’s customer if certain criteria are met.
Disclosure requirements under IFRS 15
IFRS 15 includes extensive disclosure requirements to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. These disclosures provide information about an entity’s contracts with customers, including significant judgments made in applying IFRS 15 and changes in those judgments. They also provide information about assets recognized from costs incurred to obtain or fulfill a contract with a customer.
The standard requires an entity to disclose qualitative and quantitative information about its contracts with customers, including disaggregation of revenue into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. An entity must also disclose information about its performance obligations, including when it typically satisfies them and significant changes in their balances during the reporting period.
Transition to IFRS 15
The transition to IFRS 15 requires retrospective application unless it is impracticable to do so. Under retrospective application, an entity applies IFRS 15 as if it had always been applied from the start of its first reporting period presented in accordance with IFRS 15. An entity must also provide additional disclosures about how it has applied IFRS 15 and its effect on its financial statements.
If retrospective application is impracticable for some contracts, an entity applies IFRS 15 prospectively from the date of initial application and provides additional disclosures about why retrospective application was impracticable and how it has applied IFRS 15 as a result. An entity must also disclose any significant changes in its accounting policies resulting from its application of IFRS 15.
Impact of IFRS 15 on different industries
IFRS 15 has a significant impact on different industries due to its comprehensive revenue recognition model and extensive disclosure requirements. For example, in the construction industry, revenue recognition may be affected by changes in contract modifications and variable consideration related to claims and incentives. In the software industry, revenue recognition may be affected by changes in accounting for licenses and post-contract support services.
In the telecommunications industry, revenue recognition may be affected by changes in accounting for bundled products and services and performance obligations related to network access and usage fees. In the retail industry, revenue recognition may be affected by changes in accounting for loyalty programs and gift cards as well as variable consideration related to sales incentives and returns. Overall, IFRS 15 has brought about significant changes in how revenue is recognized and disclosed across various industries, leading to improved comparability within industries and across capital markets.
It has also resulted in increased transparency and consistency in financial reporting, providing users of financial statements with better information for decision-making purposes.
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FAQs
What is IFRS 15?
IFRS 15 is the International Financial Reporting Standard that provides guidance on how and when to recognize revenue from contracts with customers. It was issued by the International Accounting Standards Board (IASB) in May 2014 and became effective for annual reporting periods beginning on or after January 1, 2018.
What is the objective of IFRS 15?
The objective of IFRS 15 is to establish principles for recognizing revenue that reflects the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
How does IFRS 15 impact revenue recognition?
IFRS 15 introduces a five-step model for recognizing revenue from contracts with customers. This model requires entities to identify the contract with the customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations, and recognize revenue when (or as) the entity satisfies a performance obligation.
What are the key principles of IFRS 15?
The key principles of IFRS 15 include the recognition of revenue when control of goods or services is transferred to the customer, the allocation of the transaction price to the performance obligations based on their standalone selling prices, and the disclosure of 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.
How does IFRS 15 impact financial reporting?
IFRS 15 has a significant impact on financial reporting as it changes the way revenue is recognized and disclosed in the financial statements. It requires entities to provide more detailed and transparent information about their revenue from contracts with customers, which may result in changes to the timing and amount of revenue recognized.