IFRS 15 Summary BRIEFLY describes ‘Revenue from Contracts with Customers’, whose objective is that an entity will RECOGNIZE 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.
IFRS 15 is EFFECTIVE for annual periods beginning on or after January 1, 2018.
Table of Contents
IFRS 15 Summary – Background [Replaced IAS 18]
IFRS 15 INCLUDES various Important requirements, such as disclosures about revenue recognition and ‘contract assets and liabilities‘.
| IFRS 15 Revenue from Contracts with Customers Replaces the Following Standards and Interpretations: |
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| IAS 11: Construction Contracts |
| IAS 18: Revenue |
| IFRIC 13: Customer Loyalty Programs |
| IFRIC 15: Agreements for the Construction of Real Estate |
| IFRIC 18: Transfer of Assets from Customers |
| SIC 31: Revenue-Barter Transactions involving Advertisement Services |
IFRS 15 – Scope
| IFRS 15 Applies to All Contracts with the Customers EXCEPT: |
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| (a) Lease Contracts |
| (b) Financial Instruments and Other Contractual Rights or Obligations |
| (c) Non-Monetary Exchanges between Entities in the Same Business to Facilitate Sales |
| (d) Insurance Contracts |
IFRS 15 Principle of Revenue Recognition
It is based on the IFRS 15 5 Step Model.
The ‘five steps‘ under IFRS 15 are as follows:
- Identify the contract(s) with the customer;
- Identify the performance obligation in the contract;
- Determine the transaction price;
- Allocate the transaction price to the performance obligation in the contract; AND
- Recognize revenue on the satisfaction of performance obligation.
IFRS 15 5 Step Model
Step 1: Identify the Contract(s) with the Customer
The First step is to identify the contract(s) with the customer.
A ‘CONTRACT’ is defined as an agreement between two or more parties that creates enforceable rights and obligations. The contract must be approved by both parties, and the parties must be committed to perform their respective obligations.
Step 2: Identify the Performance Obligation in the Contract
The Second step is to identify the performance obligation in the contract.
A ‘PERFORMANCE OBLIGATION’ is to a promise to transfer a good or service to a customer. The goods or services must be distinct i.e. they are capable of being distinct and that the customer can benefit from them on their own or together with other sources that are readily available to the customer.
Step 3: Determine the Transaction Price
The Third step is to determine the transaction price.
The ‘TRANSACTION PRICE’ is the amount of consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The transaction price may include variable consideration, such as discounts or incentives and may be affected by the time value of money.
Step 4: Allocate the Transaction Price to the Performance Obligation
The Fourth step is to allocate the transaction price to the performance obligation in the contract.
The allocation should be based on the relative standalone selling prices of the goods or services. The standalone ‘SELLING PRICE’ is the price at which the entity would sell the good or service separately.
Step 5: Recognize Revenue on the Satisfaction of the Performance Obligation
The Fifth and final step is to recognize revenue when (or as) the entity satisfies a performance obligation.
A performance obligation is considered satisfied when the customer obtains control of the good or service. ‘CONTROL’ is defined as the ability to direct the use of and obtain substantially all of the remaining benefits from the good or service.
The Bottom Line
IFRS 15 issued by the International Accounting Standards Board (IASB), outlines the principles for recognizing ‘Revenue from Contracts with Customers’. The concept IFRS 15 Summary STATES that by following the five-step model, entities can ensure that they are recognizing revenue in a way that is consistent with the underlying economics of the contract.
Chartered Accountant – ICAP
Bachelor of Accounting (Honours) – AeU, Malaysia