IFRS 15

Revenue from Contracts with

Customers
Learning outcomes

1. Explain the scope of IFRS 15

2. Set out the criteria for recognizing
revenue – 5 step model
3. Establish the rules for the measurement
of revenue
4. Apply the 5-step model to different
scenarios
 Introduction
Purpose: to establish principles that should be
applied to report useful information in FS concerning
nature, amount, timing and uncertainty of revenue and
cashflows arising from a contract with a customer.

Revenue is income from entity’s ‘ordinary activities’.

E.g. Sales, fees, interest, interest, dividends & royalties.

A contract has rights and obligations between two or

more parties.

A customer receives goods or services.

Revenue can be manipulated. Read Enron and WorldCom cases
Issue date
 Issued May 2014.
 Sets out the requirements for
recognising revenue that apply to
all contracts with customers except
for contracts within the scope of;
 leases,
 insurance contracts and
 financial instruments.

 Became effective from 1 January

2017.
Scope exclusions
 Leases, insurance, financial instruments, certain
guarantee contracts and certain non-
monetary exchanges
 Evaluate under other standards first
Supersedes
 IFRS 15 replaces the previous revenue
Standards:
 IAS 18 Revenue
 IAS 11 Construction Contracts,

 the related Interpretations on revenue

recognition:
 IFRIC 13 Customer Loyalty Programmes,
 IFRIC 15 Agreements for the Construction of
Real Estate,
 IFRIC 18 Transfers of Assets from Customers
Quick forward
 For straightforward contract such as retail
transactions, IFRS 15 will have little, if any, effect
on the amount and timing of revenue recognition.

 For other contracts, such as long-term service

contracts and multiple-element arrangements, IFRS
15 could result in some changes either to the
amount or timing of the revenue recognised by a
company.
Need for change

 Significant diversity in revenue recognition practices

 Limited guidance on many important topics, such as
accounting for arrangements with multiple elements.
 Difficult for investors and analysts (‘investors’) to
understand and compare a company’s revenue.
 Difficult to apply to complex transactions due to lack
of basis for conclusions.
 numerous industry and transaction specific
requirements, which often resulted in economically
similar transactions being accounted for differently.
 new types of transactions emerges.
Need for change

 Inadequate disclosure or information disclosed

was often presented in isolation and without
explaining how the revenue recognised related to
other information in the financial statements.

 IFRS 15 addresses those deficiencies by specifying

a comprehensive and robust framework for the
recognition, measurement and disclosure of
revenue.
Overview of the framework

 Framework for determining when to

recognise revenue and how much revenue
to recognise.

 The core principles

“a company should recognise revenue to depict the

transfer of promised goods or services to the
customer in an amount that reflects the
consideration to which the company expects to be
entitled in exchange for those goods or services”
Recognition and Measurement process:
Principle-recognise revenue when
obligation is satisfied
The five-step model:
Order of application

Core principle
Revenue recognised to depict transfer of goods or services

Step 1 - Identify the contract with the customer

Step 2 - Identify the performance obligations in the contract

Step 3 - Determine the transaction price

Step 4 - Allocate the transaction price

Step 5 - Recognise revenue when (or as) a performance obligation is

satisfied
Step 1 Identify contract with
customer
 Agreement between two or more parties that
creates enforceable rights and obligations
 No contract unless customer committed, criteria
include:
 it is probable that the entity will collect the consideration
to which it will be entitled
 Combine two or more contracts with the same
customer when:
 negotiated as a package with a single commercial
objective;
 amount of consideration to be paid in one contract
depends on the price or performance of the other
contract; or
 goods or services promised in the contracts are a
single performance obligation (see step 2)
Step 2: Identify the Performance
obligation

 Performance obligations are promises to

transfer goods or services to a customer
that are:
 Explicit (distinct or sold separately)
 Implicit (integrated with other goods or
services)
 arise from normal business practices
 Identifying performance obligations is
critical to measurement and timing of
recognition
Step 3 Determine the transaction
price

 Transaction price: amount of consideration for

exchange of goods or services
 It should be probability weighted (expected value) or
best estimate (most likely)
 More specific guidance covering:
 time value of money
 constraint on variable consideration (rebates, penalties,
discounts)
 non-cash consideration
 consideration payable to customers: reduction to
transaction price unless for a distinct good or
service.
Step 4: Allocation of transaction price
to performance obligations

 Allocate transaction price to separate performance obligations

based on relative standalone selling price:
 Actual or estimated
 Residual ‘approach’ if selling price is highly variable or uncertain
(change from current practice)
 Initial allocation and changes to variable consideration might be
allocated to a single performance obligation if:
 Contingent payment relates only to satisfaction of that
performance obligation, and
 Allocation is consistent with the amount the entity expects to be
entitled to for that performance obligation
Step 5: Revenue recognition when
performance obligation is satisfied

 Guidance applies to each separate

performance obligation
 First, evaluate if performance obligation
satisfied ‘over time’
 recognise revenue based on the pattern of
transfer to the customer

 If not point in time

 recognise revenue when control transfers
Transaction cost

 Incremental costs of obtaining a contract required to be

capitalised if expected to be recovered (e.g. sales
commissions)
 May be expensed if expected contract period less than 1 year
 Contract fulfilment costs
 Look to other guidance first (inventory, PPE)
 If out of scope of other standards, required to be capitalised if:
 Relate directly to a contract and
 Relate to future performance and
 Expected to be recovered
 Amortise capitalised costs as control transfers
 Impairment reversals required
Disclosures

 Both qualitative and quantitative information

including;
 Disaggregated information
 Contract balances and a description of significant
changes
 Amount of revenue related to remaining
performance obligations and an explanation of
when revenue is expected to be recognised
 Significant judgments and changes in judgments
  Interactive session

 Question and answers