Objective: IFRS 15 establishes principles for reporting useful information about the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers.
- Applies to all contracts with customers except leases, insurance, and financial instruments
- Replaces IAS 11, IAS 18, IFRIC 13, IFRIC 15, IFRIC 18, and SIC-31
- Core principle: Recognize revenue to depict transfer of promised goods/services to customers
Step 1: Identify the Contract
Agreement between parties that creates enforceable rights and obligations.
Step 2: Identify Performance Obligations
Distinct promises to transfer goods or services to customer.
Step 3: Determine Transaction Price
Amount of consideration expected to be entitled in exchange for transferring goods/services.
Step 4: Allocate Transaction Price
Allocate to performance obligations based on stand-alone selling prices.
Step 5: Recognize Revenue
When (or as) entity satisfies performance obligation by transferring promised good/service.
A contract exists when:
| Criterion | Description |
|---|---|
| Approval & Commitment | Parties approved contract and committed to perform |
| Rights Identifiable | Each party's rights regarding goods/services are identifiable |
| Payment Terms | Payment terms are identifiable |
| Commercial Substance | Contract has commercial substance |
| Collectibility Probable | Probable that consideration will be collected |
Sales with Early Payment Discount
Accounting Treatment: The discount is treated as a reduction of the transaction price. Revenue is recognized at the net amount (after discount) if the customer is expected to take the discount.
Sales with Buyback Option
Accounting Treatment:
- If repurchase price ≥ expected market value: Treated as financing arrangement, not a sale
- If repurchase price < expected market value: Evaluate if a sale has occurred based on control transfer
Sales with Warranty
Accounting Treatment:
- Assurance-type warranty: Treated as part of the product sale, no separate performance obligation
- Service-type warranty: Treated as separate performance obligation, revenue allocated and recognized over warranty period
Bill-and-Hold Arrangements
Accounting Treatment: Revenue recognized when control transfers to customer, which may be before physical delivery if:
- The reason for bill-and-hold is substantive
- The product is identified as belonging to the customer
- The product is ready for physical transfer
- The entity does not have ability to use the product
Consignment Arrangements
Accounting Treatment: No revenue recognized until the consignee sells the goods to end customer. The goods remain as inventory of the consignor until sold.
Sales with Right of Return
Accounting Treatment:
- Recognize revenue for products expected not to be returned
- Recognize refund liability for products expected to be returned
- Recognize asset for right to recover products (measured at former carrying amount)
Performance Obligation: Promise to transfer to customer either a good/service (or bundle) that is distinct.
- Distinct: Customer can benefit from good/service on its own or with readily available resources
- Separately Identifiable: Promise to transfer good/service is separately identifiable from other promises
- Series of distinct goods/services that are substantially the same are treated as single performance obligation
Contract: Sale of smartphone with 1-year warranty and software updates
Distinct POs:
• Smartphone (customer can benefit separately)
• Warranty service (separately identifiable)
• Software updates (separately identifiable)
- Variable Consideration: Estimated using expected value or most likely amount
- Constraints: Recognize only if probable significant reversal won't occur
- Significant Financing Component: Adjust if timing provides significant benefit
- Non-cash Consideration: Measured at fair value
- Consideration Payable to Customer: Treated as reduction of transaction price
| Pattern | Description | Examples |
|---|---|---|
| Point in Time | Revenue recognized when control transfers at specific point | Retail sales, equipment sales |
| Over Time | Revenue recognized as control transfers continuously | Construction, services, subscriptions |
Control: Ability to direct use and obtain substantially all remaining benefits.
Over Time Recognition: Revenue is recognized continuously as control of goods/services transfers to the customer.
Criteria for Over Time Recognition (one must be met):
- Customer simultaneously receives and consumes benefits as the entity performs (e.g., cleaning services)
- Entity's performance creates or enhances an asset that the customer controls as the asset is created/enhanced (e.g., construction on customer's land)
- Entity's performance does not create an asset with alternative use and the entity has an enforceable right to payment for performance completed to date (e.g., custom-made products)
Methods for Measuring Progress:
- Output Methods: Based on direct measurements of value transferred to customer (e.g., surveys of work performed, milestones reached, units delivered)
- Input Methods: Based on entity's efforts or inputs toward satisfying performance obligation (e.g., costs incurred, labor hours, machine hours)
Scenario: Construction contract for $1,000,000 over 2 years
Progress Measurement: Using cost-to-cost input method
Year 1: Costs incurred = $300,000; Total estimated costs = $800,000
Calculation: Progress = $300,000 / $800,000 = 37.5%
Revenue Recognized: $1,000,000 × 37.5% = $375,000
- Contracts with customers - disaggregation of revenue
- Contract balances and changes
- Performance obligations and transaction price allocation
- Significant judgments and changes in judgments
- Assets recognized from costs to obtain/fulfill contracts
- Practical expedients used
- Portfolio Approach: Apply to group of contracts with similar characteristics
- Incremental Costs: Expense if amortization period ≤ 1 year
- Sales Taxes: Exclude from transaction price
- Right to Invoice: Recognize revenue if corresponds directly to value transferred