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. Revenue from customers’ contracts is a single comprehensive
Revenue is now recognised by a vendor when control over the goods or services is transferred to the customer. In contrast, IAS 18 Revenue based revenue recognition around an analysis of the transfer of risks and rewards. An assessment of risks and rewards now forms one of a number of criteria that are assessed in determining whether control has been transferred.
The application of the core principle in IFRS 15 is carried out in five steps: Revenue from customers’ contracts is a single comprehensive
Identify the contract
Step 1 is to identify the contract(s) with the customer for accounting purposes, which may not be the same as the contract(s) for legal purposes. Whatever the form (written, oral or implied by an entity’s customary business practices), a contract for IFRS 15 purposes must create enforceable rights and obligations between a vendor and its customer.
Identify the separate performance obligations
After identifying the contract(s) with the customer for accounting purposes, in Step 2 a vendor identifies its separate ‘performance obligations’. A performance obligation is a vendor’s promise to transfer a good or service that is ‘distinct’ from other goods and services identified in the contract. Revenue from customers’ contracts is a single comprehensive
Goods and services (either individually, or in combination with each other) are distinct from one another if the customer can benefit from one or more goods or services on their own (or in combination with resources readily available to the customer). Two or more promises (such as a promise to supply materials (such as bricks and mortar) for the construction of an asset (such as a wall) and a promise to supply labour to construct the asset are combined if they represent one overall performance obligation.
Determine the transaction price / Allocate transaction price to performance obligations
In Step 3 a vendor determines the transaction price of each contract identified for accounting purposes in Step 1, and then in Step 4 allocates that transaction price to each of the performance obligations identified in Step 2.
Recognise revenue as or when each performance obligation is satisfied
In Step 5, a vendor assesses when it satisfies each performance obligation identified in Step 2, which is determined by reference to when the customer obtains control of each good or service. This could be at a point in time or over time, with the revenue allocated to each performance obligation in Step 4 recognised accordingly.
See how BT Group applied IFRS 15, BTGroup-IFRS15appliedtoBTFINAL
The five-step model is applied to individual contracts. However, as a practical expedient, IFRS 15 permits an entity to apply the model to a portfolio of contracts (or performance obligations) with similar characteristics if the entity reasonably expects that the effects would not differ materially from applying it to individual contracts.
This practical expedient will often be applied to situations involving measurement estimates where an entity may have many contracts which are affected by a particular issue and an estimate is more appropriately made on the population of contracts rather than on each contract individually.
Example Revenue from customers’ contracts is a single comprehensive
In a retail sale which gives the customer a right of return, it may be more appropriate to estimate the aggregate level of returns on all such retail transactions, rather than at the contract level (which is each individual retail sale on which a right of return is granted).