IFRS 15 The revenue recognition standard provides a single comprehensive standard that applies to nearly all industries and has changed revenue recognition quite significant.
IFRS 15 introduced a five step process for recognising revenue, as follows:
- Identify the contract with the customer
- Identify the performance obligations in the contract
- Determine the transaction price for the contract
- Allocate the transaction price to each specific performance obligation
- Recognise the revenue when the entity satisfies each performance obligation
In step five, after successfully navigating steps one through four, it is time to recognise revenue. This happens as each performance obligation is met by transferring a promised good or service to a customer. The transfer is complete when a customer obtains control of an asset or a service.
Like many of the other steps, there are judgements to be made. One critical judgement is whether the performance obligation is satisfied at a point in time (i.e. the promised good or service is transferred to the customer all at once) [IFRS 15 33] or if it is satisfied over time (i.e. the good or service is transferred to the customer as performance occurs) [IFRS 15 35]. It’s important to note that the determination about when a performance obligation is satisfied happens separately for each performance obligation in a contract.
Another important judgement is determining when a customer obtains control of the good or service. This determines the point at which the performance obligation is satisfied. The standard defines control as the ability to direct the use of, and obtain substantially all of the remaining benefits from the good or service in a reasonable way. Some examples include:
- Using the asset to produce goods or provide services
- Consuming it to improve an asset or decrease costs
- Selling or exchanging the asset for other valuable goods, services, or rights
- Transferring the asset to settle a liability
- Licensing or leasing the asset to others
- Pledging the asset as a security interest
- Holding the asset so that others cannot use it
Note that determining control (IFRS 15 33) as it applies in the revenue recognition standard is not always the same as the concept of control in other accounting standards, such as IFRS 10 6 – 7 – Consolidated financial statements or IFRS 9 3.2.9 – Transfers of financial assets. It is important to understand control in the context of IFRS 15 – Revenue from contracts with customers.
Again, performance obligations can be satisfied, and revenue recognised, over time or at a point in time. As covered in step 2, one of the following criteria has to be met to recognise revenue over time:
- The customer receives and consumes the benefits of the goods or services as they are provided by the entity (services like cleaning, lawn care, certain accounting and legal services)
- The goods or services create or enhance an asset that the customer controls as the asset is created or enhanced (this would be common for contractors who may renovate a home owned by the customer,or build a structure on land owned by the customer)
- The asset created does not have an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date (some examples are custom design services,or construction of a custom product to customer specifications). An enforceable right to payment for performance completed to date should include the right to costs incurred to date and a reasonable profit margin.
When recognising revenue over time, the objective is to do so in a pattern commensurate with the transfer of control to the customer. IFRS 15 41 allows the use of output or input models to measure progress towards completion.
Output methods recognise revenue based on the value transferred to the customer. Some examples of output methods are surveys of performance to date, appraisals of results achieved, milestones completed, time elapsed, and units produced. Many different output methods are acceptable provided they represent performance.
Input methods recognise revenue based on the effort to satisfy the performance obligations. Examples of input methods are resources consumed, labour hours expended, and machine hours used. Any wasted costs or costs requisitioned to a job but not used should not be included in estimating progress towards completion.
Under IFRS 15 recognising revenue over time is not a policy choice as the percentage of completion under old IFRSs. It is required for situations that meet the criteria noted above. If the criteria are not met then revenue is recognised at the point in time that control passes to the customer.
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