IFRS 15 Revenue from Contracts with Customers, this is a new revenue standard which was established by IASB (International Accounting Standards Board) and FASB(Financial Accounting Standards Board). This defines a comprehensive framework for determining when revenue should be recognised and how it should be measured.
Effective date and transition:
It was first issued in May 2014 and underwent several amendments. Its staging date is from accounting periods starting on or after 01.01.2018 with early adoption possible.
Why was it implemented?
The IFRS 15 is converged with the equivalent new US standard issued almost simultaneously by the FASB. This was done in order to improve the comparability of revenue recognition from contracts with customers in different jurisdictions. It also provides more useful information through improved disclosure requirements.
Which standards does it replace?
IFRS 15 supersedes: IAS 18 Revenue, IAS 11 Construction Contracts, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC-31 Revenue – Barter Transactions Involving advertising Services.
What does it say?
In a nutshell the new standard says that an entity should recognise revenue when it transfers goods or services to a customer. This is based upon the amount of consideration the entity expects to be entitled and does not reflect any adjustments for amounts that it might not be able to collect from the customer (that would go under credit impairment IFRS 9).
The revenue recognition is applied via a five step approach:
1) Identify the contract(s) with the customer;
2) Identify the separate performance obligations;
3) Determine the transaction price;
4) Allocate the transaction price to the performance obligations;
5) Recognise revenue when a performance obligation is satisfied;
When is a performance obligation satisfied?
The standard specifies that a performance obligation is satisfied when the customer has control over the goods or services.
IFRS applies the same recognition requirements for both goods and services and these can be either over a period of time or at point in time.
An entity recognises revenue over a period of time if and only if it fulfils one or more of the following criteria:
– The customer simultaneously received and consumes the benefit of the entity`s performance as the entity performs (i.e. cleaning services);
– The entity`s performance creates or enhances an assets that the customer controls as the asset is created or enhanced (i.e. Building construction);
– 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 the performance completed to date (i.e. bespoke software system).
When does the customer obtain control of goods or services transferred at one point in time?
The standard`s application guidance provides indicators that include but are not limited to:
– The entity has present right to payment;
– The customer has legal title to the asset;
– The entity has transferred physical possession of the asset;
– The customer has significant risks and rewards of ownership of the asset;
– The customer has accepted the asset.
Will the new standard fundamentally change when revenue will be recognised?
It is expected that majority of entities will have little impact on their revenue recognition but others may face significant changes. Nevertheless all the entities are required to undertake significant review of their contractual position with their customers in order to assess the extent to which their financial reporting may be affected. Even when there is little change to the profile of revenue recognition, entities now need to consider whether changes to systems and processes are to be implemented to comply with the new requirements, including producing the associated disclosures.
IFRS15 comes with additional qualitative and quantitative disclosure that includes, among other things, information about:
– Revenue recognised from contracts with customers that implies listing revenue by categories;
– Details of contracts balances, assets and liabilities;
– Performance obligations, amount of the transaction price allocated to the remaining performance obligations and when the entity expects to fulfil those remain performance obligations;
– Significant judgements and estimations.
Get in touch
If you need any assistance on the matter here above, you can reach us at
Telephone: +44 (0)20 7353 9200