IFRS 15 Revenue from Contracts with Customers (contents page is here) introduced a single and comprehensive framework which sets out how much revenue is to be recognised, and when. The core principle is that a vendor should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the vendor expects to be entitled in exchange for those goods or services. See a summary of IFRS 15 here.
Revenue is recognised when (or as) goods or services are transferred to a customer. A vendor satisfies each of its performance obligations (that is, it fulfils its promises to the customer) by transferring control of the promised good or service underlying that performance obligation to the customer.
In the past requirements for revenue recognition (IAS 18 Revenue) were based around an assessment of whether the risks and rewards of ownership of a good or service had been transferred to a customer. The application of the control criterion to all types of transactions for providing goods or services is one of the main changes in IFRS 15 compared with past practice. Under the control model, an analysis of risks and rewards is only one of a number of factors to be considered and this may lead to a change in the timing of revenue recognition in certain industries.
Control in the context of IFRS 15 is the ability to direct the use of, and obtain substantially all of the remaining benefits from, an asset. It includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset. Indicators that control has passed include that the customer has:
- A present obligation to pay,
- Physical possession of the asset(s),
- Legal title, Recognise revenue when each performance obligation
- Risks and rewards of ownership, Recognise revenue when each performance obligation
- Accepted the asset(s).
The benefits of an asset are the potential cash flows (inflows or savings in outflows) that can be obtained directly or indirectly, such as by:
- Using the asset to produce goods or provide services (including public services),
- Using the asset to enhance the value of other assets, Recognise revenue when each performance obligation
- Using the asset to settle liabilities or reduce expenses,
- Selling or exchanging the asset, Recognise revenue when each performance obligation
- Pledging the asset to secure a debt liability,
- Holding the asset.
When evaluating whether a customer obtains control of an asset, a vendor considers any agreement to repurchase the asset transferred to the customer, or a component of that asset.
For each performance obligation, a vendor determines at contract inception whether control is transferred over time or at a point in time. If it is determined that a vendor does not satisfy a performance obligation over time, the performance obligation is deemed to be satisfied at a point in time.