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IFRS 15 – Revenue from Contracts with Customers (part 1)

Michał DREAS
Audit Manager at RSM Poland

According to experts, the new IFRS 15 concerning revenue recognition is a major milestone in accounting/reporting in recent years.

As a result of a convergence project, the International Accounting Standards Board (IASB) and the Financial Standards Accounting Board (FSAB, operating in the US) have jointly prepared new standards concerning revenue: IFRS 15 and ASC606, respectively.

In the present study, we are going to focus on the basic principles that guided the authors of the new IFRS 15. As regards recognising revenue, there have been two standards in place to date, i.e. IAS 11 and IAS 18, along with published interpretations (IFRIC).

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IAS 18 / IAS 11 vs. IFRS 15

The scope of IAS 18 covered accounting for revenue from the following transactions and events:

  • sale of services,
  • sale of goods,
  • use of assets generating interest, royalties and dividends.

The scope of IAS 11 covered settling and accounting for construction contracts.

Below you will find a brief description of standards that have been replaced by the new IFRS 15:

Before IFRS 15

IFRS 15

IAS 11 – Construction Contracts
IAS 18 – Revenue

IFRS 15 – Revenue from Contracts with Customers

IFRIC 13 – Customer Loyalty Programmes
IFRIC 15 – Agreements for the Construction of Real Estate
IFRIC 18 – Transfers of Assets from Customers
SIC-31 – Revenue – Barter Transactions Involving Advertising Services

When attempting to compare the scope of IAS 18 and IAS 11 with the scope of the new IFRS 15, one must say that the approach to recognising revenue from the sale of services, sale of goods, royalties and revenue from construction contracts has now been addressed in IFRS 15, whereas the approach to recognising revenue from interest and dividends has been excluded from the scope of this new standard. However, such a definition of the scope of IFRS 15 would oversimplify the problem in question. The objective of IFRS 15 is to establish the principles 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. The standard fails to distinguish different types of transactions and events (as it was the case with IAS 18 and IAS 11), but instead defines transactions on the basis of performance obligations being either satisfied at a point in time or satisfied over time.

Eventually, IFRS 15 applies to all contracts with customers except for:

  • leases within the scope of IAS 17 Leases (replaced by IFRS 16);
  • insurance contracts within the scope of IFRS 4 Insurance Contracts (replaced by IFRS 17);
  • financial instruments and other contractual rights or obligations within the scope of IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures and
  • non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers.

The table below presents key differences between IAS 18/IAS 11 and IFRS 15:

IAS 18 / IAS 11

IFRS 15

Separate models:

  • sale of goods
  • sale of services
  • construction contracts

Single model to determine performance obligations:

  • satisfied at a point of time or
  • satisfied over time

Revenue is recognised when risks and benefits are transferred (to put it simply).

Revenue is recognised as control (over a good or service) is passed to the customer (however, the transfer of risks and benefits may be an indication of having control).

What seems crucial is to understand the difference between performance obligations satisfied over time and at a point in time.

Performance obligations satisfied over time

In line with the standard, the entity transfers the control over a good or service over time, thus satisfying the performance obligation, and recognises revenue over time, if one of the following conditions is met:

  • the customer simultaneously receives and consumes all of the benefits provided by the entity as the entity performs;
  • the entity’s performance creates or enhances an asset that the customer controls  (for example, a work in process) as the asset is created or enhanced or
  • 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 the performance completed to date.

Performance obligations satisfied at a point in time

If the performance obligation is not satisfied over time, the entity satisfies its performance obligation at a point in time. In order to define the point in time when the customer takes control over the promised asset and the entity satisfies its performance obligation, the entity shall consider circumstances indicating that the control has been passed, and these include, but are not limited to the following:

  • the entity has a present right to payment for the asset,
  • the customer has a legal title to the asset,
  • the entity has transferred physical possession of the asset,
  • the customer has significant risks and rewards related to the ownership of the asset,
  • the customer has accepted the asset.

We will discuss this topic in more detail in one of the upcoming articles.

Recognising revenue / five-step model framework​

The core principle of the model framework is that the entity shall recognise revenue in a point in time (or over time) when its performance obligation is satisfied through the transfer of the promised good or service (i.e. an asset) to the customer. The asset it transferred when the customer obtains control over this asset.

To comply with this principle, the entity employs a five-step model framework for recognising revenue, which includes the following steps:

  1. Identify the contract with the customer,
  2. Identify elements (different obligations) included in the contract,
  3. Determine the price,
  4. Allocate the price to relevant elements of the contract,
  5. Recognise revenue when the entity satisfies conditions related to different elements of the contract.

We encourage you to read our commentary to new standard IFRS 16 – Lease. In the upcoming articles, we are going to present the details of different steps of this model framework.

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