ACCA SBR: IFRS 15 Revenue from Contracts with Customers

Updated: Sep 5, 2020

For entities follow International Financial Reporting Standards (IFRSs), they should adopt IFRS 15 Revenue from contracts with customers for periods beginning or after 1 January 2018. No matter you are preparing for professional accountancy exam, working as an accountant, or a senior management in a company, you need to understand what it is and what’re the impacts on financial statements.

Before IFRS 15 is in place, IAS 18 Revenue and IAS 11 Construction Contracts governed the accounting treatment on revenue. So, why do we need to change from IAS 18 / IAS 11 to IFRS 15? What are the scopes of IFRS 15?

What is the purpose of IFRS 15?

Revenue is an important element for users of financial statements while it is used to assess a company’s financial performance and being analysed against inventory or receivables.

However, the requirements from IAS 18 and IAS 11 under IFRS (which are covered by International Accounting Standards Board (IASB)) are very different from ASC 605 under FASB (Financial Accounting Standards Board, is responsible for U.S. Generally Accepted Accounting Principles (GAAP)).

IFRS in revenue recognition requirements was lack of sufficient detail but U.S. GAAP requirements were considered to be overly prescriptive and conflicting in certain areas, as stated by them.

In order to improve the financial reporting of revenue and comparability of the top line in financial statements globally, the public demand to converge recognition of revenue to these two big standards setters are huge.

To respond the challenges, two boards developed converged requirements for the recognition of revenue in both IFRS and U.S. GAAP.

It is the background explaining why do we have IFRS 15 Revenue for Contracts with Customers.

Accounting for Revenue - Changes from IAS 18 to IFRS 15
Accounting for Revenue - Changes from IAS 18 to IFRS 15

What is the meaning of IFRS 15?

The core principle of IFRS 15 is for companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the companies expect to be entitled in exchange for those goods or services.

In its publication on adoption of IFRS 15, Deloitte points out the standard is a complex standard, introducing far more prescriptive requirements than were previously included in the IFRSs that it replaces, (IAS 18 Revenue, IAS 11 Construction Contracts). However, it requires the application of significant judgement in some areas.

Specifically, IAS 18 and IAS 11 provided separate revenue recognition models for goods, services and construction contracts. But IFRS 15, there is only a single model on identification of performance obligations –

  • Satisfied at a point in time;

  • Satisfied over time.

Hence, some contract manufacturing revenue may be recognized over time and some construction contracts revenue may be recognized at a point in time. In revenue recognition, IFRS 15 focuses on control, instead of focusing on risk and rewards under IAS 18 and IAS 11.

A 5-step approach is adopted in revenue recognition under IFRS 15, which describes the identification of performance obligations as well.

How is revenue recognised under IFRS 15?

As stated, IFRS 15 core principle is an entity should recognize revenue to depict transfer of goods or services. The standard adopts a five-step model. The five steps are –

  1. Identify the contract(s) with a customer

  2. Identify the performance obligations in the contract

  3. Determine the transaction price

  4. Allocate the transaction price to performance obligations

  5. Recognize revenue when (or as) performance obligations are satisfied

To comply with IFRS 15, every company must follow the five-step model. I won’t go into details but will brief you as below.

Step 1: Identify the contract(s) with a customer

A contract does not have to be written in order for it to meet the criteria for revenue recognition; however, it does need to create enforceable rights and obligations.

Step 2: Identify the performance obligations in the contract

Distinct goods and services should be accounted for as separate deliverables (a.k.a “unbundling”). These distinct goods and services are referred to as ‘performance obligations’, which are promises in a contract with customers to transfer goods or services.

IFRS 15 - Distinct Test formula