International Financial Reporting Standard (IFRS) 15 Revenues from Contracts with Customers sets out the requirements for recognising revenue that apply to contracts with customers, except for those covered by standards on leases, insurance contracts and financial instruments.
IFRS 15 supersedes IAS 11 Construction Contracts and IAS 18 Revenue and is applicable for periods beginning on or after 1 January 2018.
The standard applies a single five-step model to determine when to recognise revenue, and at what amount. Revenue is recognised when (or as) an entity transfers control of goods or services to a customer either over time or at a point in time. These 5 steps are as below
1. Identify contract with the customer
A contract can be written, oral, implied by the entity’s customary business practices or any agreement that creates legally enforceable rights and obligations.
2. Identify separate Performance Obligations (PO)
Once the contract is identified, determining all the promises in an agreement is crucial. This entails significant judgment considering the evolution and diversity of sales strategies that involve varying free goods or services and even construction of assets at a customer’s location (e.g. permanent displays). Other complexities include activation, connection services and other upfront fees for the telecommunication industry, and design services and procurement of equipment for construction business.
2. Determine Transaction Prices (TP)
The new revenue recognition model requires methodically assessing the consideration for each good or service to be delivered. Any variable consideration (i.e. discounts, rebates, customer incentives and other promotional schemes) may impact the calculation of transaction price at the time of revenue recording.
4. Allocate Transaction Price to Performance Obligation
If there is more than one performance obligation in a contract, the same should be identified and allocated with the transaction price. Arrangements that may impact allocation of transaction price include loyalty programs, loyalty points, selling price that varies among customers for a broad range of amounts (for telecommunication), and award and incentive payments (for construction).
5. Recognise revenue when/as Performance Obligation is satisfied
Under this new model, control determines the revenue recognition. Transfer of risks and rewards now only serves as one of the considerations in determining if control has been transferred. To simply demonstrate, revenue should not be recognized for goods with a high probability of return. The new model also requires balance sheet accounting of this right of return that will result in recognizing a refund liability and the corresponding cost of the inventory as an asset (currently not specified under the old revenue standard). Other industries will have similar complexities in determining transfer of control.
When first applying IFRS 15, entities should apply the standard in full for the current period, including retrospective application to all contracts that were not yet complete at the beginning of that period. In respect of prior periods, the transition guidance allows entities an option to either apply IFRS 15 in full to prior periods (with certain limited practical expedients being available) or retain prior period figures as reported under the previous standards, recognising the cumulative effect of applying IFRS 15 as an adjustment to the opening balance of equity as at the date of initial application (beginning of current reporting period).
PRESENTATION AND DISCLOSURE
Contracts with customers will be presented in an entity’s statement of financial position as a contract liability, a contract asset, or a receivable, depending on the relationship between the entity’s performance and the customer’s payment. [IFRS 15:105]
A contract liability is presented in the statement of financial position where a customer has paid an amount of consideration prior to the entity performing by transferring the related good or service to the customer. [IFRS 15:106]
Where the entity has performed by transferring a good or service to the customer and the customer has not yet paid the related consideration, a contract asset or a receivable is presented in the statement of financial position, depending on the nature of the entity’s right to consideration.
A contract asset is recognised when the entity’s right to consideration is conditional on something other than the passage of time, for example future performance of the entity. A receivable is recognised when the entity’s right to consideration is unconditional except for the passage of time.
Contract assets and receivables shall be accounted for in accordance with IFRS 9. Any impairment relating to contracts with customers should be measured, presented and disclosed in accordance with IFRS 9. Any difference between the initial recognition of a receivable and the corresponding amount of revenue recognised should also be presented as an expense, for example, an impairment loss. [IFRS 15:107-108]
The disclosure objective stated in IFRS 15 is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Therefore, an entity should disclose qualitative and quantitative information about all of the following: [IFRS 15:110]
• its contracts with customers;
• the significant judgments, and changes in the judgments, made in applying the guidance to those contracts; and
• any assets recognised from the costs to obtain or fulfil a contract with a customer.
Entities will need to consider the level of detail necessary to satisfy the dis clo sure objective and how much emphasis to place on each of the requirements. An entity should aggregate or disaggregate disclosures to ensure that useful information is not obscured. [IFRS 15:111]
In order to achieve the disclosure objective stated, the Standard introduces a number of new disclosure requirements. Further detail about these specific requirements can be found at IFRS 15:113-129.