Revenue

The revenue reporting standard IFRS 15 spells big changes for some entities and industries. Find out how it affects you

In Brief

  • IFRS 15 takes effect for periods starting on or after 1 January 2018; early adoption is permitted
  • It replaces several standards, establishing a single standard for all entities in all industries
  • The standard may have little effect on some entities but require significant changes for others

What’s changing?

IFRS 15 Revenue from Contracts with Customers is a comprehensive framework for determining when and how much revenue to recognise.

The core principle [of IFRS 15] is that 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.
International Accounting Standards Board (IASB)

IFRS 15 aims to solve the problem of there being too many different recognition practices in use. This diversity arose because similar transactions have often been accounted for in different ways, due to inconsistencies and other shortfalls in the existing standards.

What IFRS 15 replaces

  • 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.

Who is affected

For most straightforward contracts, there will be few, if any, changes to the amount and timing of revenue recognition. However, for contracts that extend over time or have multiple elements, there could be changes. For some entities, those changes could be significant.

Here are some examples of contracts that may be affected:

  • construction contracts
  • licences
  • customer incentives such as free product giveaways, coupons issued with purchase, rights of return, and loyalty programmes
  • product warranties
  • bundled products such as mobile phones sold with service contracts.

The sectors most likely to be affected include:

  • telecommunications
  • construction
  • motor vehicle industry
  • software industry
  • entertainment industry.

When IFRS 15 commences

IFRS 15 takes effect for periods beginning on or after 1 January 2018; early adoption is permitted. The new standard must be applied retrospectively to each prior period, but an alternative transition method is also offered.

Learn more

Get more details about IFRS 15 from the IASB.

Visit the IASB website

Five steps for recognising revenue

  • 1 - Identify the contract(s) with the customer

    IFRS 15 defines a contract as:

    “An agreement between two or more parties that creates enforceable rights and obligations”.

    All of these conditions in IFRS 15 must be met:

    • The contract has been approved by all parties
    • Each party’s rights can be identified
    • The payment terms can be identified
    • The contract has commercial substance
    • It is probable that payment will be collected.
  • 2 - Identify the performance obligations in the contract

    IFRS 15 defines a performance obligation as:

    “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.”

    A good or service is considered distinct when:

    • the customer can benefit from it; or
    • the promise to transfer the good or service is separate from other promises in the contract.
  • 3 - Determine the transaction price

    IFRS 15 defines the transaction price as:

    “The amount of consideration (fixed, variable, non-cash) an entity expects to be entitled to for the goods or services in the contract.”

  • 4 - Allocate the transaction price

    If there is more than one performance obligation in a contract, the total transaction price should be set according to the standalone selling prices of the performance obligations. IFRS 15 suggests three approaches to estimating a standalone selling price if it’s not known:

    • adjusted market assessment
    • expected cost plus margin
    • residual.
  • 5 - Recognise revenue when a performance obligation is satisfied

    Revenue should be recognised when the customer gains control of the good or service promised in the contract. IFRS 15 requires that at the start of the contract, the entity has to determine whether it will meet its performance obligation over a period of time or at a particular point in time.