IFRS 15 — Revenue from Contracts with Customers

https://www.iasplus.com/en/standards/ifrs/ifrs15

Overview

IFRS 15 specifies how and when an IFRS reporter will recognise revenue as
well as requiring such entities to provide users of financial statements with
more informative, relevant disclosures. The standard provides a single,
principles based five-step model to be applied to all contracts with
customers.

IFRS 15 was issued in May 2014 and applies to an annual reporting period
beginning on or after 1 January 2018. On 12 April 2016, clarifying amend-
ments were issued that have the same effective date as the standard itself.

History of IFRS 15
Date Development Comments

Project on revenue added

June 2002 History of the project
to the IASB's agenda

Discussion Paper Prelimi-

nary Views on Revenue
19 December 2008 Comment deadline 19 June 2009
Recognition in Contracts
with Customers published

Exposure Draft ED/2010/6

24 June 2010 Revenue from Contracts Comment deadline 22 October 2010
with Customers published

Exposure Draft ED/2011/6

Revenue from Contracts
14 November 2011 Comment deadline 13 March 2012
with Customers published
(re-exposure)

Effective for an entity's first annual

IFRS 15 Revenue from
IFRS financial statements for
28 May 2014 Contracts with Customers
periods beginning on or after 1
issued
January 2017

11 September IASB defers effective date New effective date of IFRS 15 is 1

2015 of IFRS 15 to 1 January January 2018
 2018

Effective for an entity's first annual

IFRS financial statements for
periods beginning on or after 1
Clarifications to IFRS 15 January 2018
12 April 2016 'Revenue from Contracts
with Customers' issued The amendments do not change the
underlying principles of the
standard, just clarify and offer
some additional transition relief.

Related Interpretations

None

Amendments under consideration by the IASB

None

Superseded Standards

IFRS 15 replaces the following standards and interpretations:

IAS 11 Construction contracts

IAS 18 Revenue
IFRIC 13 Customer Loyalty Programmes
IFRIC 15 Agreements for the Construction of Real Estate
IFRIC 18 Transfers of Assets from Customers
SIC-31 Revenue - Barter Transactions Involving Advertising Services

Summary of IFRS 15

Objective
The objective of IFRS 15 is to establish the principles that an entity shall
apply to report useful information to users of financial statements about
the nature, amount, timing, and uncertainty of revenue and cash flows
arising from a contract with a customer. [IFRS 15:1] Application of the
standard is mandatory for annual reporting periods starting from 1
January 2018 onwards. Earlier application is permitted.

Scope

IFRS 15 Revenue from Contracts with Customers applies to all contracts with
customers except for: leases within the scope of IAS 17 Leases; financial in-
struments 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; insurance contracts within the
scope of IFRS 4 Insurance Contracts; and non-monetary exchanges between
entities in the same line of business to facilitate sales to customers or
potential customers. [IFRS 15:5]

A contract with a customer may be partially within the scope of IFRS 15 and
partially within the scope of another standard.  In that scenario: [IFRS 15:7]

if other standards specify how to separate and/or initially measure one

or more parts of the contract, then those separation and measurement
requirements are applied first. The transaction price is then reduced by
the amounts that are initially measured under other standards;
if no other standard provides guidance on how to separate and/or
initially measure one or more parts of the contract, then IFRS 15 will be
applied. 

Key definitions

[IFRS 15: Appendix A]

Contract
An agreement between two or more parties that creates enforceable
rights and obligations.
Customer
A party that has contracted with an entity to obtain goods or services
that are an output of the entity’s ordinary activities in exchange for
consideration.
Income
Increases in economic benefits during the accounting period in the
form of inflows or enhancements of assets or decreases of liabilities
that result in an increase in equity, other than those relating to contri-
butions from equity participants.
Performance obligation
A promise in a contract with a customer to transfer to the customer
either:

a good or service (or a bundle of goods or services) that is distinct;

or
a series of distinct goods or services that are substantially the same
and that have the same pattern of transfer to the customer.

Revenue
Income arising in the course of an entity’s ordinary activities.
Transaction price
The amount of consideration to which an entity expects to be entitled
in exchange for transferring promised goods or services to a customer,
excluding amounts collected on behalf of third parties.

Accounting requirements for revenue

The five-step model framework

The core principle of IFRS 15 is that an entity will recognise 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.  This core principle is
delivered in a five-step model framework: [IFRS 15:IN7]

Identify the contract(s) with a customer

Identify the performance obligations in the contract
Determine the transaction price
Allocate the transaction price to the performance obligations in the
contract
Recognise revenue when (or as) the entity satisfies a performance oblig-
ation.

Application of this guidance will depend on the facts and circumstances

present in a contract with a customer and will require the exercise of
judgment.

Step 1: Identify the contract with the customer

A contract with a customer will be within the scope of IFRS 15 if all the
following conditions are met: [IFRS 15:9]

the contract has been approved by the parties to the contract;

each party’s rights in relation to the goods or services to be transferred
can be identified;
the payment terms for the goods or services to be transferred can be
identified;
the contract has commercial substance; and
it is probable that the consideration to which the entity is entitled to in
exchange for the goods or services will be collected.

If a contract with a customer does not yet meet all of the above criteria, the
entity will continue to re-assess the contract going forward to determine
whether it subsequently meets the above criteria. From that point, the
entity will apply IFRS 15 to the contract. [IFRS 15:14]

The standard provides detailed guidance on how to account for approved

contract modifications. If certain conditions are met, a contract modifica-
tion will be accounted for as a separate contract with the customer. If not, it
will be accounted for by modifying the accounting for the current contract
with the customer. Whether the latter type of modification is accounted for
prospectively or retrospectively depends on whether the remaining goods
or services to be delivered after the modification are distinct from those
delivered prior to the modification. Further details on accounting for
contract modifications can be found in the Standard. [IFRS 15:18-21].

Step 2: Identify the performance obligations in the contract

At the inception of the contract, the entity should assess the goods or
services that have been promised to the customer, and identify as a perfor-
mance obligation: [IFRS 15.22]

a good or service (or bundle of goods or services) that is distinct; or

a series of distinct goods or services that are substantially the same and
that have the same pattern of transfer to the customer.

A series of distinct goods or services is transferred to the customer in the

same pattern if both of the following criteria are met: [IFRS 15:23]  

each distinct good or service in the series that the entity promises to
transfer consecutively to the customer would be a performance obliga-
tion that is satisfied over time (see below); and
a single method of measuring progress would be used to measure the
entity’s progress towards complete satisfaction of the performance
obligation to transfer each distinct good or service in the series to the
customer.

A good or service is distinct if both of the following criteria are met: [IFRS
15:27]

the customer can benefit from the good or services on its own or in con-
junction with other readily available resources; and
the entity’s promise to transfer the good or service to the customer is
separately idenitifable from other promises in the contract.
Factors for consideration as to whether a promise to transfer goods or
services to the customer is not separately identifiable include, but are not
limited to: [IFRS 15:29]

the entity does provide a significant service of integrating the goods or

services with other goods or services promised in the contract;
the goods or services significantly modify or customise other goods or
services promised in the contract;
the goods or services are highly interrelated or highly interdependent.

Step 3: Determine the transaction price

The transaction price is the amount to which an entity expects to be entitled

in exchange for the transfer of goods and services. When making this deter-
mination, an entity will consider past customary business practices. [IFRS
15:47]

Where a contract contains elements of variable consideration, the entity

will estimate the amount of variable consideration to which it will be
entitled under the contract. [IFRS 15:50] Variable consideration can arise,
for example, as a result of discounts, rebates, refunds, credits, price conces-
sions, incentives, performance bonuses, penalties or other similar items.
Variable consideration is also present if an entity’s right to consideration is
contingent on the occurrence of a future event.  [IFRS 15:51]

The standard deals with the uncertainty relating to variable consideration

by limiting the amount of variable consideration that can be recognised.
Specifically, variable consideration is only included in the transaction price
if, and to the extent that, it is highly probable that its inclusion will not
result in a significant revenue reversal in the future when the uncertainty
has been subsequently resolved. [IFRS 15:56]

However, a different, more restrictive approach is applied in respect of

sales or usage-based royalty revenue arising from licences of intellectual
property. Such revenue is recognised only when the underlying sales or
usage occur. [IFRS 15:B63]
Step 4: Allocate the transaction price to the performance obligations in the
contracts

Where a contract has multiple performance obligations, an entity will

allocate the transaction price to the performance obligations in the contract
by reference to their relative standalone selling prices. [IFRS 15:74] If a
standalone selling price is not directly observable, the entity will need to
estimate it. IFRS 15 suggests various methods that might be used, including:
[IFRS 15:79]

Adjusted market assessment approach

Expected cost plus a margin approach
Residual approach (only permissible in limited circumstances).

Any overall discount compared to the aggregate of standalone selling prices

is allocated between performance obligations on a relative standalone
selling price basis. In certain circumstances, it may be appropriate to
allocate such a discount to some but not all of the performance obligations.
[IFRS 15:81]

Where consideration is paid in advance or in arrears, the entity will need to

consider whether the contract includes a significant financing arrangement
and, if so, adjust for the time value of money. [IFRS 15:60] A practical
expedient is available where the interval between transfer of the promised
goods or services and payment by the customer is expected to be less than
12 months. [IFRS 15:63]

Step 5: Recognise revenue when (or as) the entity satisfies a performance
obligation

Revenue is recognised as control is passed, either over time or at a point in

time. [IFRS 15:32]

Control of an asset is defined as the ability to direct the use of and obtain
substantially all of the remaining benefits from the asset. This includes the
ability to prevent others from directing the use of and obtaining the
benefits from the asset. The benefits related to the asset are the potential
cash flows that may be obtained directly or indirectly. These include, but
are not limited to: [IFRS 15:31-33]

using the asset to produce goods or provide services;

using the asset to enhance the value of other assets;
using the asset to settle liabilities or to reduce expenses;
selling or exchanging the asset;
pledging the asset to secure a loan; and
holding the asset.

An entity recognises revenue over time if one of the following criteria is

met: [IFRS 15:35]

the customer simultaneously receives and consumes all of the benefits

provided by the entity as the entity performs;
the entity’s performance creates or enhances an asset that the customer
controls as the asset is created; or
the entity’s performance does not create an asset with an alternative use
to the entity and the entity has an enforceable right to payment for per-
formance completed to date.

If an entity does not satisfy its performance obligation over time, it satisfies
it at a point in time. Revenue will therefore be recognised when control is
passed at a certain point in time. Factors that may indicate the point in time
at which control passes include, but are not limited to: [IFRS 15:38]

the entity has a present right to payment for the asset;

the customer has legal title to the asset;
the entity has transferred physical possession of the asset;
the customer has the significant risks and rewards related to the
ownership of the asset; and
the customer has accepted the asset.

Contract costs
The incremental costs of obtaining a contract must be recognised as an
asset if the entity expects to recover those costs. However, those incremen-
tal costs are limited to the costs that the entity would not have incurred if
the contract had not been successfully obtained (e.g. ‘success fees’ paid to
agents). A practical expedient is available, allowing the incremental costs of
obtaining a contract to be expensed if the associated amortisation period
would be 12 months or less. [IFRS 15:91-94]

Costs incurred to fulfil a contract are recognised as an asset if and only if all
of the following criteria are met: [IFRS 15:95]

the costs relate directly to a contract (or a specific anticipated contract);

the costs generate  or enhance resources of the entity that will be used
in satisfying performance obligations in the future; and
the costs are expected to be recovered.

These include costs such as direct labour, direct materials, and the alloca-
tion of overheads that relate directly to the contract. [IFRS 15:97]

The asset recognised in respect of the costs to obtain or fulfil a contract is

amortised on a systematic basis that is consistent with the pattern of
transfer of the goods or services to which the asset relates. [IFRS 15:99]

Further useful implementation guidance in relation to applying IFRS 15

These topics include:

Performance obligations satisfied over time

Methods for measuring progress towards complete satisfaction of a per-
formance obligation
Sale with a right of return
Warranties
Principal versus agent considerations
Customer options for additional goods or services
Customers’ unexercised rights
 Non-refundable upfront fees
Licensing
Repurchase arrangements
Consignment arrangements
Bill-and-hold arrangements
Customer acceptance
Disclosures of disaggregation of revenue

These topics should be considered carefully when applying IFRS 15.

Presentation in financial statements

Contracts with customers will be presented in an entity’s statement of

financial position as a contract liability, a contract asset, or a receivable,
depending on the relationship between the entity’s performance and the
customer’s payment. [IFRS 15:105]

A contract liability is presented in the statement of financial position where

a customer has paid an amount of consideration prior to the entity per-
forming by transferring the related good or service to the customer. [IFRS
15:106]

Where the entity has performed by transferring a good or service to the

customer and the customer has not yet paid the related consideration, a
contract asset or a receivable is presented in the statement of financial
position, depending on the nature of the entity’s right to consideration. A
contract asset is recognised when the entity’s right to consideration is con-
ditional on something other than the passage of time, for example future
performance of the entity. A receivable is recognised when the entity’s right
to consideration is unconditional except for the passage of time.

Contract assets and receivables shall be accounted for in accordance with

IFRS 9. Any impairment relating to contracts with customers should be
measured, presented and disclosed in accordance with IFRS 9. Any differ-
ence between the initial recognition of a receivable and the corresponding
amount of revenue recognised should also be presented as an expense, for
example, an impairment loss. [IFRS 15:107-108]

Disclosures

The disclosure objective stated in IFRS 15 is for an entity to disclose suffi-

cient information to enable users of financial statements to understand the
nature, amount, timing and uncertainty of revenue and cash flows arising
from contracts with customers. Therefore, an entity should disclose qualita-
tive and quantitative information about all of the following: [IFRS 15:110]

its contracts with customers;

the significant judgments, and changes in the judgments, made in
applying the guidance to those contracts; and
any assets recognised from the costs to obtain or fulfil a contract with a
customer.

Entities will need to consider the level of detail necessary to satisfy the dis-
closure objective and how much emphasis to place on each of the require-
ments. An entity should aggregate or disaggregate disclosures to ensure
that useful information is not obscured. [IFRS 15:111]

In order to achieve the disclosure objective stated above, the Standard in-
troduces a number of new disclosure requirements. Further detail about
these specific requirements can be found at IFRS 15:113-129.

Effective date and transition

The standard should be applied in an entity’s IFRS financial statements for

annual reporting periods beginning on or after 1 January 2018. Earlier ap-
plication is permitted.  An entity that chooses to apply IFRS 15 earlier than 1
January 2018 should disclose this fact in its relevant financial statements.
[IFRS 15:C1]
When first applying IFRS 15, entities should apply the standard in full for
the current period, including retrospective application to all contracts that
were not yet complete at the beginning of that period. In respect of prior
periods, the transition guidance allows entities an option to either: [IFRS
15:C3]

apply IFRS 15 in full to prior periods (with certain limited practical ex-
pedients being available); or
retain prior period figures as reported under the previous standards,
recognising the cumulative effect of applying IFRS 15 as an adjustment
to the opening balance of equity as at the date of initial application
(beginning of current reporting period).