IFRS 15 Overview
IFRS 15 Revenue from contracts with customers is the end product of a major joint project between the IASB and the US Financial Accounting Standards Board and replaces IAS 18, IAS 11, IFRIC 13, IFRIC 15, IFRIC 18 and SIC 31. IFRS 15 summary:
IFRS 15 will have an impact on all entities that enter into contracts with customers. IFRS 15 guidance above:
- Establishes a new control-based revenue recognition model
- Changes the basis for deciding whether revenue is recognized at a point in time or over time
- Provides new and more detailed guidance in specific topics; and
- Expands and improves disclosures about revenue.
IFRS 15 Revenue from contracts with customers introduces ‘five (5) step model’ for IFRS revenue recognition.
- Identify the contact(s) with the customer
- Identify the separate performance obligations
- Determine the transaction price
- Allocate the transaction price
- Recognize revenue when or as an entity satisfies performance obligations
The above steps are necessary for IFRS revenue recognition criteria.
Revenue – is income arising in the course of an entity’s ordinary activities.
Contract – is an agreement between two or more parties that creates enforceable rights and obligations.
Customer – is a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities.
THE FIVE STEPS MODEL
Step 1 – Identify the contract(s) with customer
The contract with a customer may be written, oral or implied by an entity’s customary business practices. The general contract identification rules are:
- The parties have approved the contract
- The entity can identify each party’s rights (goods and cash)
- The entity can identify the payment terms (e.g. on 30 days credit)
- Its is probable the entity will collect the consideration.
Step 2 – Identify the separate performance obligation in the contract
Performance obligation – is a promise in a contract with a customer to transfer to the customer either:
- A good or service
- A series of distinct goods or services
Performance obligations are normally specified in the contract but could also include:
- Promises implied by an entity’s customary business practices
- Published policies or specific statements that create a valid customer expectation that goods or services will be transferred under the contract.
Step 3 – Determine the transaction price
An entity must consider the terms of the contract and its customary practices in determining the transaction price. An entity must consider the effect of all the following factors when determining the transaction price:
- Variable consideration – The transaction price will be adjusted for performance bonus, discounts, incentives or penalties
- Time value of money – Transaction price is adjusted for the effects of time value of money if the contract includes a significant financing component
- Non-cash consideration – An entity shall measure the non-cash consideration at fair value (e.g. shares)
- Consideration payable to customer – Includes cash amount that an entity pays to customer. It will be treated as reduction of the transaction price.
The transaction price is not adjusted for effects of the customer’s credit risk (e.g. bad debts).
Step 4 – Allocate the transaction price to the performance obligations
Stand-alone selling price – is the price at which an entity would sell a promised good or service separately to a customer.
Following are the three (3) methods for estimating the stand-alone selling price:
- Market assessment approach
- Expected cost plus margin approach
- Residual approach
The entity allocates a contract’s transaction price (see step – 3) to each separate performance obligation (see step – 2) on a relative stand-alone selling price basis at contract inception.
The difference between the stand-alone price and allocated price is the inherent ‘discount amount’.
Step 5 – Recognize revenue when or as an entity satisfies performance obligations
After the allocation at step – 4 the question arises as to when and how the revenue is recognized and recorded.
Revenue is recognized when the promised goods or services are transferred to a customer.
Recording revenue at a point in time or over time?
- A performance obligation may be satisfied at a point in time (typically for transfer of goods); or
- A performance obligation may be satisfied over time (typically for services).
Recording revenue over time
When goods or services are transferred continuously, a revenue recognition method that best depicts the entity’s performance should be applied. There are two methods for measuring revenue over time:
- Output methods
- Input methods
Outputs are the goods or services finished and transferred to the customer. This method records revenue by measuring value to customer of good or services:
- Surveys of work performed
- Units produced as percentage of total units to be produced
- Units delivered as a percentage of total units to be delivered
- Contract milestones achieved.
- Cost incurred as a percentage of total cost to be incurred
- Labour hours used as a percentage of total labour hours to be used
- Machine hours used as a percentage of total machine hours to be used.
IFRS 15 PDF
IFRS 15 standard with IFRS 15 rules is available in PDF version. Click to Download new IFRS Revenue recognition standard.