IFRS 15 – Revenue from Contracts with Customers

IFRS 15 supersedes the following standards and interpretations:

1. IAS 11 Construction Contracts,
2. IAS 18 Revenue,
3. IFRIC 13 Customer Loyalty Programmes,
4. IFRIC 15 Agreements for the Construction of Real Estate,
5. IFRIC 18 Transfers of Assets from Customers, and
6. SIC-31 Revenue-Barter Transactions Involving Advertising Services.

Why the need for a new Standard on Revenue

Revenue is an important number to users of financial statements in assessing an entity’s financial performance and position. Prior to IFRS 15, revenue recognition requirements in International Accounting Standards and International Financial Reporting Standards differed from those in US GAAP. IAS 11 and IAS 18 provided limited guidance and they could be difficult to apply to complex transactions. Furthermore, IAS 18 provided limited guidance on revenue issues such as accounting for multiple element arrangements.

The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB), initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard that would:

1. Remove inconsistencies and weaknesses in previous revenue requirements,
2. Provide a more robust framework for addressing revenue issues,
3. Improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets,
4. Provide more useful information to users of financial statements through improved disclosure requirements, and
5. Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.

The main features of IFRS 15

According to IFRS 15 an entity recognizes revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The recognition of revenue is achieved through the application of the following 5 steps:

Step 1 – Identify the contract (or contracts) with a customer

A contract is an agreement between two or more parties that creates enforceable rights and obligations. The requirements of IFRS 15 apply to each contract that has been agreed upon with a customer and meets specified criteria. In some cases, IFRS 15 requires an entity to combine contracts and account for them as one contract.

Step 2 – Identify the Performance Obligations in the contract

A contract includes promises to transfer goods or services to a customer. If those goods or services are distinct, the promises are performance obligations and are accounted for separately. A good or service 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 and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.

Step 3 – Determine the Transaction Price

The transaction price is the amount of consideration in a contract to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The transaction price can be a fixed amount of customer consideration, but it may sometimes include variable consideration or consideration in a form other than cash. The transaction price is also adjusted for the effects of the time value of money if the contract includes a significant financing component and for any consideration payable to the customer. If the consideration is variable, an entity estimates the amount of consideration to which it will be entitled in exchange for the promised goods or services. The estimated amount of variable consideration will be included in the transaction price only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

Step 4 – Allocate the Transaction Price to the Performance Obligation in the Contract

An entity typically allocates the transaction price to each performance obligation on the basis of the relative stand-alone selling prices of each distinct good or service promised in the contract. If a stand-alone selling price is not observable, an entity estimates it. Sometimes, the transaction price includes a discount or a variable amount of consideration that relates entirely to a part of the contract. The requirements specify when an entity allocates the discount or variable consideration to one or more, but not all, performance obligations (or distinct goods or services) in the contract.

Step 5 – Recognize Revenue when (or as) the entity satisfies a Performance Obligation

An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service). The amount of revenue recognized is the amount allocated to the satisfied performance obligation. A performance obligation may be satisfied at a point in time (typically for promises to transfer goods to a customer) or over time (typically for promises to transfer services to a customer). For performance obligations satisfied over time, an entity recognizes revenue over time by selecting an appropriate method for measuring the entity’s progress towards complete satisfaction of that performance obligation.

Disclosure Requirements

IFRS 15 also includes a cohesive set of disclosure requirements that would result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. Specifically, IFRS 15 requires an entity to provide information about:

1. Revenue recognized from contracts with customers, including the disaggregation of revenue into appropriate categories,
2. Contract balances, including the opening and closing balances of receivables, contract assets and contract liabilities,
3. Performance obligations, including when the entity typically satisfies its performance obligations and the transaction price that is allocated to the remaining performance obligations in a contract,
4. Significant judgments, and changes in judgments, made in applying the requirements to those contracts, and
5. Assets recognized from the costs to obtain or fulfill a contract with a customer.