IFRS 15 “Revenue from Contracts with Customers” introduces several new rules on revenue recognition. The standard requires that financial reports provide useful information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
As required by IFRS 15, revenue is recognized when a performance obligation is satisfied by transferring a promised good or service to the customer (i.e., when the customer obtains control of that good or service).
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 provide services to a customer). For obligations satisfied over time, the company should select an appropriate method for measuring progress to determine accurately the amount of revenue to be recognized corresponding to the portion of the obligation fulfilled. Industries such as telecommunications, software development, and real estate are significantly affected by this new accounting standard.
IFRS 15 introduces a five-step revenue recognition model, applicable to all types of transactions, across all companies and industries. Depending on how the performance obligation is satisfied, this model applies in two forms:
(1) Revenue recognized over time;
(2) Revenue recognized at a point in time.
The timing of revenue recognition, under IFRS 15’s core principle, is based on when control over the product/service is transferred to the customer. Control is a broader concept compared to the “risks and rewards” criteria previously used to determine when revenue should be recognized.
1. Transition Issues
| Content | IFRS | VAS |
| IFRS 15: Revenue from Contracts with Customers – VAS 14: Revenue | ||
| Scope | A contract with a customer falls within the scope of IFRS 15 if all five (5) of the following conditions are met: a) The contract has been approved by the parties to the contract; b) The rights of each party regarding the goods or services to be transferred can be identified; c) The payment terms for the goods or services to be transferred can be identified; d) The contract has commercial substance; and e) It is probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services to be transferred. | Revenue recognition is the process of determining that an item meets the definition of revenue in the Statement of Profit or Loss when the following conditions are satisfied: a) It is probable that the economic benefits associated with the revenue item will flow to the entity; and b) The amount of revenue can be measured reliably. |
| Core Principle | The core principle of IFRS 15 is that an entity shall recognize revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. | Not addressed. |
| Five-Step Model Framework** | This core principle is presented within the framework of the five-step model:
| Revenue shall be recognized as follows: a) Sale of goods: When the significant risks and rewards have been transferred to the buyer, the seller no longer retains control over the goods, and the amount can be measured reliably. b) Rendering of services: Recognized using the percentage of completion method. c) Interest: Recognized on an accrual basis. d) Royalties: Recognized on an accrual basis in accordance with the substance of the contract. e) Dividends: Recognized when the shareholder’s right to receive the dividend is established. |
| Specific Implementation Guidance | IFRS 15 includes the following specific implementation guidance: (a) Performance obligations satisfied over time; (b) Methods for measuring progress to determine the degree of completion of a performance obligation; (c) Revenue with a right of return; (d) Warranties; (e) Principal vs. agent considerations; (f) Customer options for additional goods or services; (g) Customer unexercised rights; (h) Non-refundable upfront fees; (i) Licensing; (j) Repurchase agreements; (k) Consignment arrangements; (l) Bill-and-hold arrangements; (m) Customer acceptance; (n) Disclosures on revenue disaggregation. | Not addressed. |
** Five-Step Model Framework:
Step 1: Identify the contract with the customer
A contract is defined as an agreement (including oral or implied) between two or more parties that creates enforceable rights and obligations and sets criteria for each of those rights and obligations. The contract must have commercial substance, and the parties must be able to exchange and recognize the consideration to which they are entitled.
Step 2: Identify the performance obligations in the contract
A performance obligation in a contract is a promise (including implied promises) to transfer goods or services to the customer. Each performance obligation must be separately identifiable and distinct within the contract.
Step 3: Determine the transaction price
The transaction price is the amount of consideration that the entity expects to be entitled to in exchange for transferring the promised goods or services to the customer, excluding amounts collected on behalf of third parties.
Step 4: Allocate the transaction price to the performance obligations in the contract
For contracts with multiple performance obligations, the entity allocates the transaction price to each separate performance obligation in exchange for satisfying each obligation. Acceptable methods for allocating the transaction price include:
- Adjusted market assessment approach;
- Expected cost plus margin approach; and
- Residual approach, in limited circumstances. Discounts offered must be allocated proportionately to all performance obligations unless certain criteria are met, and reallocation of standalone selling prices is not permitted after initial recognition.
Step 5: Recognize revenue when the entity satisfies a performance obligation
The entity should recognize revenue at a point in time, except when any of the following three criteria are met, requiring revenue recognition over time:
- The entity is creating or enhancing an asset that the customer controls as it is created or enhanced;
- The customer simultaneously receives and consumes the benefits provided as the entity performs;
- The asset being created has no alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.
2. Tasks to Be Performed?
- It is necessary to conduct an impact assessment of IFRS 15 along with other standards, review existing contracts with customers and related accounting treatments, renegotiate and amend contracts to appropriately reflect the economic terms of the transactions, and involve legal and accounting advisors to better interpret contract terms and assess the applicability of IFRS 15.
- Additionally, adjust IT systems to comply with the requirements of the standard and implement other necessary changes to ensure readiness for applying IFRS 15.
