IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS
The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to users of financial s tatements about the nature, amount, timing, and u ncertainty of revenue and cash flows arising from a contract with a customer. [IFRS 15:1] Ap plicatio n of the s tandard is mandatory for annual reporting periods startin g from 1 January 2018 onwards. Earlier application is permitte
The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to users of financial s tatements about the nature, amount, timing, and u ncertainty of revenue and cash flows arising from a contract with a customer. [IFRS 15:1] Ap plicatio n of the s tandard is mandatory for annual reporting periods star tin g from 1 January 2018 onwards. Earlier application is permitte
OBJECTIVE OF IFRS 15
The objective of IFRS 15 is to establish the principles that should be applied by an entity in
order to report useful information to users of financial statements about the nature, amount,
timing and uncertainty of revenue and cash flows arising from a contract with a customer (IFRS
15:1)
The standard was issued in May 2014 and supersedes:
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; and
SIC 13 Revenue – Barter Transactions Involving Advertising Services
DEFINITIONS
Appendix A to IFRS 15 provides the following definition of terms used in the Standard:
A contract is defined as “an agreement between two or more parties that creates the
enforcement of rights and obligations”
A contract asset is defined as “an entity’s right to consideration in exchange for goods
or services that the entity has transferred to a customer when that right is conditioned
on something other than the passage of time (for example the entity’s future
performance)”
A contract liability is defined as “an entity’s obligation to transfer goods or services
to a customer for which the entity has received consideration (or the amount due) from
the customer”
A customer is defined as “a party that has contacted with an entity to obtain goods and
services that are an output of the entity’s ordinary activities in exchange for
consideration”
Income is defined as “increases in economic benefit during the accounting period in
the form of inflows or enhancements of assets or decreases of liabilities that result in
an increase in equity, other than those relating to contributions from equity participants”
A performance obligation is defined as “a promise in contract with a customer to
transfer to the customer either:
o A good or service (or a bundle of goods or services) that is distinct, or
o A series of distinct goods or services that are substantially the same and that
have the same pattern of transfer to the customer”.
Revenue is defined as “income arising in the course of an entity’s ordinary activities”
The stand-alone selling price of a good or service is defined as “the price at which an
entity would sell a promised good or service separately to a customer”
The transaction price for a contract with a customer is defined as “the amount of
consideration to which an entity expects to be entitled in exchange for transferring
promised goods or services to a customer, excluding amounts collected on behalf of
third parties”.
The five-step model for recognising revenue from contracts with customers
Step 1: Identify the contract(s) with a customer
An entity may account for a contract within the scope of IFRS 15 if all the following criteria
are met:
a) The contract has been approved whether in writing, orally or according to other
customary business practice. Additionally, the parties must be committed to performing
their respective obligations;
b) Each party’s rights and obligations regarding the contract can be identified by the entity;
c) The payment terms for the goods or services to be transferred can be identified by the
entity;
d) The contract has commercial substance (i.e. the risk, timing or amount of the entity’s
future cash flows is expected to change as a result of the contract); and
e) It is probable that the entity will collect the consideration to which it will be entitled in
exchange for the goods or services to be transferred to the customer.
Step 2: Identify the performance obligations
An entity must assess whether there are goods or services promised in the contract that
represent separate performance obligations. A separate performance obligation can be
either:
a) A good or service (or bundle of goods or services) that is distinct; or
b) A series of distinct goods or services that are substantially the same and that have the
same pattern of transfer to the customer.
Step 3: Determine the transaction price
The transaction price is the amount of consideration to which an entity expects to be entitled
in exchange for transferring promised goods or services to a customer, excluding those
amounts collected on behalf of third parties. In determining the transaction price, the effects
of the following should be considered:
a) Variable consideration such as performance bonuses/penalties, incentives, rights of
return and discounts;
b) Constraining estimates of variable consideration such as the time value of money;
c) The existence of a significant financing component in the contract
d) Non-cash consideration such as share consideration, material equipment, labour and
contribution of assets from the customer for purposes of contract being met where the entity
gains control of those assets; and
e) Consideration payable to a customer such as coupons, vouchers, volume rebates and
shelf space payments.
Step 4: Allocate the transaction price to the performance obligations in the contract
IFRS 15 requires that the transaction price be allocated to each performance obligation
identified in the contract on a relative stand-alone selling price basis subject to exceptions that
may be applicable when allocating discounts and when allocating consideration that includes
variable amounts. The requirement to allocate the transaction price does not apply if a
contract has only one performance obligation.
Step 5: Determine when to recognise revenue
Revenue is recognised when (or as) the entity satisfies a performance obligation by transferring
a promised good or service (i.e. an asset) to the customer. An asset is transferred when (or as)
the customer obtains control of that asset. Control of an asset refers to the ability to direct the
use of, and obtain substantially all of the remaining benefits from, an asset. Benefits are
potential cash flows or savings.
Contract Modifications
This is a change in the scope or price (or both) of a contract that is approved by the parties to
the contract. This occurs when the parties to the contract approve a modification that either
creates new or changes existing enforceable rights and obligations of the parties to the contract.
This has to be approved in writing, orally or by customary business practice. If the contract
modification has not yet been approved, IFRS 15 should continue to be applied to the existing
contract until the modification is approved.
Modifications should be treated as an adjustment to the original contract unless they merely
add a further performance obligation that is both distinct and priced based on an appropriately
adjusted stand-alone selling price. If the modification is treated as an adjustment to the original
contract, the appropriate accounting depends on the remaining goods or services to be delivered
under the contract.
If the remaining goods or services are distinct or priced at their stand-alone price, then the
modification must be treated as a separate contract and accounted for as if it were a new
contract.
If the goods or services are not distinct with stand-alone prices then the promised goods and
services not yet transferred at the date of modification must be accounted for as part of the
original contract. Update both the transaction price and the measure of the incomplete
obligations.
Where there is a combination of distinct and not distinct goods or services, judgement should
be used to account for the modification in a manner consistent with the objectives of the
contract modification requirements of IFRS 15.
DMS 2021
