IFRS 15 was issued in May 2014 and applies to an annual reporting period beginning on or after 1 January 2018. IFRS 15 requires an entity to recognize revenue by applying the five steps below.
Step 1 – Identify contract with the customer
A contract falls within the scope of IFRS 15 if all of the following criteria are met:
- parties have approved the contract (this could be in writing, orally or even implied)
- entity can identify each party’s rights
- entity can identify payment terms
- contract has commercial substance (i.e. future cash flows expected to change as result of the contract)
- it is probable that entity will collect the consideration (customer’s ability and intention to pay that amount of consideration when it is due).
Step 2 – Identify performance obligation(s)
At contract inception, an entity shall assess the goods and services promised in a contract with a customer and shall identify as a performance obligation each promise 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.
Note: A good or service is distinct if both of the following criteria are met:
- the customer can benefit from the good or services on its own or in conjunction with other readily available resources; and
- the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.
Step 3 – Determine transaction Price
The amount to which the entity expects to be ‘entitled’. Includes variable consideration (e.g. a conditional bonus payment) if highly probable that significant reversal of cumulative revenue will not occur.
Step 4 – Allocate transaction price to performance obligations
Multiple deliverables: transaction price allocated to each separate performance obligation in proportion to the stand-alone selling price at contract inception of each performance obligation.
Step 5 – Recognize revenue when (or as) performance obligation satisfied
Revenue is recognized as control is passed, either over time or at a point in time. (i.e. when entity transfers a promised good or service to a customer).
Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.
Company A enters into a contract on 1 May 20X5 to construct a machine on a customer’s premises. The consideration was agreed at a price of $300.000 with a bonus of $20.000, if the machine is completed within 2 years. Company A determines that it is highly probable that the bonus will be achieved.
At 30 April 20X6, Company A has satisfied 60% of its performance obligation on the basis of costs incurred to date. At year end the customer has paid an amount of $210.000.
Since it is highly probable that the bonus will be received, revenue recognized will be as follows:
60% * $320.000 ($300.000 + $20.000) = $192.000
The table below summarizes the treatment:
|1 May 20X5||30 April 20X6|
|Cash r/d||$ –||$ 210.000,00|
|Revenue||$ –||$ 192.000,00|
DR Cash $210.000
CR Revenue $192.000
Cr Contract Liability $18.000 (b)
Company C enters into a contract on January 15, 20X7 to sell Mr. Brown a TV, a Video Projector and a Sound Bar System for a price of $1.800. The standalone selling prices of each item are $1.100, $500, and $400 respectively. The Video Projector will be delivered on January 18, 20X7 and the TV & Sound Bar System will be delivered on February 10, 20X7.
From the information given above a $200 discount (or 10%) has been granted ($2.000 – $1.800). The discount should be allocated to the 3 items proportionately based on their stand-alone selling prices.
|TV||$ 1.100,00||$ -110,00||$ 990,00|
|Video Projector||$ 500,00||$ -50,00||$ 450,00|
|Sound Bar System||$ 400,00||$ -40,00||$ 360,00|
|TOTAL||$ 2.000,00||$ -200,00||$ 1.800,00|
Satisfaction of a performance obligation over time
An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time if one of the following criteria is met:
- the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs;
- the entity’s performance creates or enhances an asset (e.g. work in progress) that the customer controls as the asset is created or enhanced; 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 performance completed to date.
Note: For each performance obligation satisfied over time, revenue should be recognized by measuring progress towards complete satisfaction of that performance obligation.
Satisfaction of a performance obligation at a point in time
To determine the point in time when a customer obtains control of a promised asset and an entity satisfies a performance obligation, the entity would consider indicators of the transfer of control that include, but are not limited to, the following:
- 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 of ownership of the asset; and
- the customer has accepted the asset.
Costs of obtaining a contract
Incremental costs of obtaining a contract (e.g. sales commissions) are recognized as an asset if the entity expects to recover them.
Costs to fulfil a contract
If the costs to fulfil a contract (e.g. a construction company may need to mobilize equipment to the construction site) are not within the scope of another Standard (e.g. IAS 2 Inventories or IAS 16 Property, Plant and Equipment), they should be recognized as an asset only if they meet all of the following:
- the costs relate directly to a contract or an anticipated contract that the entity can specifically identify;
- the costs generate or enhance resources of the entity that will be used in satisfying (or in continuing to satisfy) performance obligations in the future; and
- the costs are expected to be recovered.
Amortization of costs recognized as an asset
The asset should be amortized to profit or loss on a systematic basis consistent with the pattern of transfer of the goods or services to which the asset relates.
For the costs of obtaining a contract, if the amortization period is estimated to be one year or less, the costs may be recognized as an expense when incurred.
An impairment loss should be recognized in profit or loss to the extent that the carrying amount exceeds:
- the remaining amount of consideration that the entity expects to receive in exchange for the goods or services to which the asset relates; less
- the costs that relate directly (e.g., direct labor and direct material) to providing those goods or services that have not yet been recognized as expenses.