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Introduction
Revenue is an important number to users of financial statements in assessing an entity’s financial performance and position. However, previous revenue recognition requirements in
(IFRS) differed from those in US Generally Accepted Accounting Principles (US GAAP) and both sets of requirements were in need of improvement.
Accordingly, the International Accounting Standards Board (IASB) and the US national standard-setter, the Financial Accounting Standards Board (FASB), initiated a joint project to clarify the principles for recognising revenue and to develop a common revenue standard for IFRS and US GAAP that would:
(a) remove inconsistencies and weaknesses in previous revenue requirements;
(b) provide a more robust framework for addressing revenue issues;
(c) improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; provide more useful information to users of financial statements through improved disclosure requirements; and
(e) simplify the preparation of financial statements by reducing the number
of requirements to which an entity must refer.
IFRS 15, together with Topic 606 that was introduced into the FASB Accounting Standards Codification® by Accounting Standards Update 2014-09 Revenue from Contracts with Customers (Topic 606), completes the joint effort by the IASB and the FASB to meet those objectives and improve financial reporting by creating a common revenue recognition standard for IFRS and US GAAP.
Commencement
IFRS 15 is effective for annual periods beginning on or after 1 January 2018. Earlier application is permitted.
Requirements
International Financial Reporting Standard 15 Revenue from Contracts with Customers (IFRS 15) establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Specifically, IFRS 15 requires an entity to provide information about:
(a) revenue recognised from contracts with customers, including the disaggregation of revenue into appropriate categories;
(b) contract balances, including the opening and closing balances of receivables, contract assets and contract liabilities;
(c) 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;
(d) significant judgements, and changes in judgements, made in applying the requirements to those contracts; and
(e) assets recognised from the costs to obtain or fulfil a contract with a customer.
Scope
An entity shall apply this Standard to all contracts with customers, except the following:
(a) lease contracts within the scope of IFRS 16 Leases;
(b) insurance contracts within the scope of IFRS 4 Insurance Contracts;
(c) financial instruments and other contractual rights or obligations within the scope of 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
(d) non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers. For example, this Standard would not apply to a contract between two oil companies that agree to an exchange of oil to fulfil demand from their customers in different specified locations on a timely basis.
An entity shall apply this Standard to a contract (other than a contract listed above) only if the counterparty to the contract is a customer. A counterparty to the contract would not be a customer if, for example, the counterparty has contracted with the entity to participate in an activity or process in which the parties to the contract share in the risks and benefits that result from the activity or process (such as developing an asset in a collaboration arrangement) rather than to obtain the output of the entity’s ordinary activities.
A contract with a customer may be partially within the scope of this Standard and partially within the scope of other Standards listed above (exceptions).
This Standard specifies the accounting for the incremental costs of obtaining a contract with a customer and for the costs incurred to fulfil a contract with a customer if those costs are not within the scope of another Standard.
Core Principle
The core principle of IFRS 15 is that an entity recognizes 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. An entity recognizes revenue in accordance with that core principle by applying the following steps:
Step 1: Identify the contract(s) with a customer— In certain cases, bundling of contracts is possible. Contract Modifications/Changes (CRs) are also covered within its ambit. They (CRs) can be considered as separate contracts in certain cases.
Step 2: Identify the performance obligations in the contract— If the 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.
Step 4: Allocate the transaction price to the performance obligations 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: Recognise revenue when (or as) the entity satisfies a 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 recognises revenue over time by selecting an appropriate method for measuring the entity’s progress towards complete satisfaction of that performance obligation.
Repeal
IFRS 15 supersedes:
(a) IAS 11 Construction Contracts;
(b) IAS 18 Revenue;
(c) IFRIC 13 Customer Loyalty Programmes;
(d) IFRIC 15 Agreements for the Construction of Real Estate;
(e) IFRIC 18 Transfers of Assets from Customers; and
(f) SIC-31 Revenue—Barter Transactions Involving Advertising Services.