IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS

INTRODUCTION
IFRS 15 Revenue from Contracts with Customers replaces:

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
SIC-31 RevenueBarter Transactions Involving Advertising Services

OBJECTIVE AND CORE PRINCIPLE

The objective of the Standard is to establish the principles that an entity shall apply 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.
To meet the objective, the core principle of the Standard is that an entity shall recognise revenue to
depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services.
SCOPE
IFRS 15 applies to contracts to deliver goods or services to a customer. A customer is a party that has
contracted with an entity to obtain goods or services that are an output of the entitys ordinary activities
in exchange for consideration.
IFRS 15 sets out the requirements for recognising revenue that apply to all contracts with customers
except:

lease contracts within the scope of IAS 17;

insurance contracts within the scope of IFRS 4;
financial instruments and other contractual rights or obligations within the scope of IFRS 9, IFRS 10,
IFRS 11, IAS 27 and IAS 28; and
non-monetary exchanges between entities in the same line of business to facilitate sales to customers
or potential customers.

OVERVIEW OF THE REVENUE MODEL

There is a five-step model to determine when entities recognise revenue, and at what amount.
Step 1

identify the contract(s) with a customer

Step 2

identify the performance obligations in the contract

Step 3

determine the transaction price

Step 4

allocate the transaction price to the performance obligations in the contract

Step 5

recognise revenue when (or as) the entity satisfies a performance obligation

Step 1: Identify the contract

Step 1 requires the identification of the contract with the customer. A contract is an agreement
between two or more parties that creates enforceable rights and obligations. Contracts can be written,
oral or implied by an entitys customary business practices.

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A contract with a customer is in the scope of the Standard when it is legally enforceable and all of the
following criteria are met:

the contract is approved and the parties are committed to their obligations;
rights to goods or services and payment terms can be identified;
the contract has commercial substance; and
collection of consideration is probable.

Any consideration received under a contract with a customer that does not meet these criteria is
recognised as a liability until either of the following events has occurred:

there are no remaining obligations to transfer goods or services and all, or substantially all, of the
promised consideration has been received and is non-refundable; or
the contract is terminated and the consideration that has been received is non-refundable.

Combination of contracts
Two or more contracts entered into at or near the same time with the same customer (or related parties)
are combined and accounted for as a single contract, if one or more of the following criteria are met:

the contracts are negotiated as a package with a single objective;

the consideration in one contract depends on the price or performance of the other contract; or
the goods or services promised in the contracts (or some of the goods or services promised in each of
the contracts) are a single performance obligation.

Contract modifications
A contract modification is a change in the scope or price (or both) of a contract that is approved by the
parties to the contract. The modification is approved when it creates legally enforceable rights and
obligations on the parties to the contract.
A contract modification is accounted for as follows:
Is contract modification approved?

No

Do not account for contract

modification until approved

Yes
Does it add distinct good or
services that are priced
commensurate with standalone selling prices?

Are remaining goods or

services distinct from
those already transferred?

No

Yes

Yes

Account for as separate contract

Account for as
termination of existing
contract and creation
of new contract

No
Account for as part
of the original
contract

Step 2: Identify the performance obligations in the contract

Step 2 requires the identification of the separate performance obligations in the contract. At contract
inception, an entity assesses the goods or services explicitly or implicitly promised in a contract and then
identifies as a performance obligation each promise to transfer to a customer a distinct good or service.

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A good or service is distinct if both of the following criteria are met:

the customer can benefit from the good or service either on its own or together with other resources
that are readily available to the customer; and
the entitys promise to transfer the good or service to the customer is separately identifiable from
other promises in the contract.

IFRS 15 requires a series of distinct goods and services that are substantially the same with the same
pattern of transfer to be regarded as a single performance obligation.
Step 3: Determine the transaction price
Step 3 requires the entity to determine the transaction price which is the amount of consideration to
which an entity expects to be entitled in exchange for transferring goods or services to a customer. The
transaction price excludes amounts collected on behalf of third parties e.g. certain sales taxes.
In determining the transaction price, an entity considers the effect of the following:
Variable
consideration

The existence of
a significant
financing
component in the
contract

Non-cash
consideration

Consideration
payable to a
customer

If the consideration promised in a contract includes a variable amount, an entity

shall estimate the amount of consideration to which the entity will be entitled in
exchange for transferring the promised goods or services to a customer.
Examples of variable consideration: discounts, rebates, refunds, credits, price
concessions, incentives, performance bonuses, penalties, rights of return and
consideration contingent on the occurrence or non-occurrence of a future event.
An entity can only include variable consideration in the transaction price to the
extent that it is highly probable that a subsequent change in the estimated
variable consideration will not result in a significant revenue reversal; ie variable
consideration is constrained.
Variable consideration is estimated as either the expected value or the most likely
amount.
The time value of money is reflected in the transaction price if the contract has a
significant financing component.
Practical expedient: no requirement to reflect time value of money if the period
between customer payment and the transfer of goods or services is one year or
less.
When a customer promises consideration in a form other than cash ie non-cash
considerationit is measured at fair value.
If a reasonable estimate of fair value cannot be made, then the estimated selling
price of the promised goods or services is used for reference.
Consideration payable to a customer includes cash amounts that an entity pays or
expects to pay to the customer or to other parties that purchase the entitys goods
or services from the customer.
Consideration payable also includes credit or other itemseg a coupon or voucher
that can be applied against amounts owed to the entity, or to other parties that
purchase the entitys goods or services from the customer.
Consideration payable to a customer is treated as a reduction of the transaction
price, unless the payment to the customer is in exchange for a distinct good or
service that the customer transfers to the entity.

Step 4: Allocate the transaction price to the performance obligations in the contract
Step 4 requires the allocation of the transaction price to each performance obligation on the basis of the
relative stand-alone price of each distinct good or service. The stand-alone selling price is the price at
which an entity would sell a promised good or service separately to a customer.

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If an observable selling price is not available, an estimate may be made by using one of the following
approaches. An entity maximises the use of observable inputs and applies a consistent estimation
method.

Adjusted market assessment approach

Evaluate the market in which goods or services are sold

and estimate the price that customers in the market
would be willing to pay

Expected cost plus a margin approach

Forecast the expected costs of satisfying a performance

obligation and then add an appropriate margin for that
good or service

Residual approach (limitations to use)

Subtract the sum of the observable stand-alone selling

prices of other goods or services promised in the
contract from the total transaction price

Discounts and variable consideration will typically be allocated proportionately to all of the performance
obligations in the contract, except when there is objective evidence that they relate to one or more
specific performance obligations.
Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation
Step 5 requires an entity to recognise revenue when (or as) it satisfies a performance obligation by
transferring a promised good or service to a customer, which is when the customer obtains control of that
good or service.
A performance obligation may be satisfied at a point in time or over time.
Performance obligations satisfied over time
An entity recognises revenue over time when one of the following criteria is met.
The customer simultaneously receives and
consumes the benefits provided by the entity's
performance as the entity performs.

eg many routine or recurring

services

The entity's performance creates or enhances

an asset that the customer controls as the asset
is created or enhanced.

eg constructing an asset on a
customer's site in some
jurisdictions

The entity's performance does not create an

asset with an alternative use to the entity and
the entity has an enforceable right to payment
for performance completed to date.

eg constructing a specialised asset

that only the customer can use, or
constructing an asset to a
customer's specification

Measuring progress
For each performance obligation satisfied over time, an entity selects a single method for measuring
progress and applies it consistently to determine how much revenue should be recognised. Appropriate
methods include:

Output methodmeasures performance based on the value of the goods delivered relative to those
undelivered. Examples: surveys of performance to date, appraisals of results achieved, milestones
reached, units delivered and units produced.
Input methodmeasures performance based on the entitys efforts or inputs towards satisfying the
performance obligation relative to the total expected inputs. Examples: resources consumed, costs
incurred, labour hours expended and machine hours used.

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An entity recognises revenue over time only if it can reasonably measure its progress towards complete
satisfaction of the performance obligation. In circumstances in which it cannot reasonably measure the
outcome, but expects to recover the costs incurred in satisfying the performance obligation, an entity
recognises revenue only to the extent of the costs incurred.
Performance obligations satisfied at a point in time
If a performance obligation is not satisfied over time, then the entity recognises revenue at the point at
which it transfers control of the good or service to the customer. The customer has control of a good or
service when it has the ability to direct the use of, and obtain substantially all of the remaining benefits
from, the good or service.
Indicators that control has passed include the customer having:

a present
obligation
to pay

legal title

physical
possession

the risks
and
rewards of
ownership

accepted
the asset

CONTRACT COSTS
Incremental costs to obtain a contract

An entity recognises an asset for the incremental costs incurred as a result of obtaining a contract eg
sales commissions if those costs are expected to be recovered.
Costs that are incurred regardless of whether the contract is obtained are recognised as expenses as
they are incurred unless they meet the criteria to be capitalised as fulfilment costs.
As a practical expedient, an entity is not required to capitalise the incremental costs to obtain a
contract if the amortisation period of the resulting asset would not exceed one year.

Costs to fulfil a contract

If costs incurred to fulfil a contract with a customer are not within the scope of another Standard, then an
entity recognises an asset for fulfilment costs that meet the following criteria:

they relate to an existing contract or specific anticipated contract;

they generate or enhance resources of the entity that will be used to satisfy the performance
obligations in the future; and
they are expected to be recovered.

Amortisation and impairment

Capitalised costs to obtain and/or fulfil a contract are amortised on a systematic basis that is consistent
with the pattern of transfer of the good or service to which the asset relates.
An impairment related to the capitalised costs is recognised in profit or loss to the extent that the
carrying amount exceeds the recoverable amount.
An entity recognises a reversal of any impairment recorded when impairment conditions improve.
Following reversal of an impairment, the carrying amount of the asset cannot exceed the carrying amount
that would have been determined if no impairment had been recognised and the asset had continued to
be amortised.

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APPLICATION GUIDANCE
IFRS 15 provides application guidance to assist entities in applying the model to:

performance obligations satisfied over time;

methods for measuring progress;
sale with a right of return;
warranties;
principal versus agent considerations;
customer options for additional goods or services;
customers unexercised rights;
non-refundable upfront fees (and some related costs);
licensing;
repurchase agreements;
consignment arrangements;
bill-and-hold arrangements;
customer acceptance; and
disclosure of disaggregated revenue.

PRESENTATION
When either the entity or the customer has performed, the entity presents a contract asset or contract
liability in its statement of financial position. If the entity has an unconditional right to consideration,
then this is presented separately as a receivable.
DISCLOSURE
There is an explicit disclosure objective: to disclose sufficient information to help investors better
understand the following aspects of revenue and cash flows from contracts with customers:

nature;
amount;
timing; and
uncertainty.

The detailed disclosure requirements include qualitative and quantitative information about:

revenue, including disaggregation;

impairment losses recognised on receivables or contract assets;
contract balances;
performance obligations;
transaction price allocated to remaining performance obligations ie order book;
significant judgements; and
assets recognised from the costs to obtain or fulfil a contract.

EFFECTIVE DATE AND TRANSITION

Effective date
Following the September 2015 amendment to the Standard, IFRS 15 is effective for annual periods
beginning on or after 1 January 2018. Early adoption is permitted.

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Transition
An entity applies the Standard to all of its contracts with customers using either:
the retrospective method; or
the cumulative effect method.
Retrospective method

Cumulative effect method

The cumulative effect of applying the

Standard is recognised at the start of the
earliest comparative period. Some
practical expedients apply.

The cumulative effect of applying the

Standard is recognised as of the date of
inital application, with no restatement of
comparative information.

Disclosures are required

Note: the date of initial application is the start of the reporting period in which an entity first applies
the Standard. For instance, for an entity with a calendar year-end applying the Standard for the first
time as of the amended mandatory effective date and presenting one comparative period, the date of
initial application would be 1 January 2018.
Summary of the transition options
Approach

2017

2018

Date of equity
adjustment

Full retrospectiveno
practical expedient

IFRS 15

IFRS 15

1 January 2017

Retrospective with
practical expedients

Mixed
requirements*

IFRS 15

1 January 2017

Cumulative effect

IAS 11,18

IFRS 15
1 January 2018
IAS 11,18

* includes a mix of IFRS 15 for the restated contracts and IAS 11/18 final variable consideration where

practical expedients are applied.

for certain contracts, where the IAS 11/18 accounting was not completed at the date of initial
application.
+

AMENDMENT TO EFFECTIVE DATE AND CLARIFICATIONS

In September 2015 the effective date of IFRS 15 was deferred by one year to 1 January 2018 with early
adoption permitted.
In July 2015 Exposure Draft ED/2015/6 proposed clarifications in the following four areas: Identifying
performance obligations; Principal versus agent considerations; Licensing; and Practical expedients on
transition. However no substantive changes are expected to the guidance in the original Standard.
IMPLEMENTATION ISSUES AND THE TRG
IFRS 15 is a complex new Standard converged between IFRS and US GAAP that may change existing
recognition and measurement practice for some entities, particularly compared to existing US GAAP.
To assist implementation, the IASB and FASB have jointly established a Transition Resource Group (TRG) as
a public forum for preparers, auditors and users to share implementation experience and discuss issues
submitted to the TRG.
The TRG may suggest further consideration of an issue by the two Boards. It does not issue guidance.

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