IFRS 15

IFRS 15 Revenue from Contracts with Customers is the standard in International Financial Reporting Standards that determines when an entity recognises revenue and how much. Its core principle is that revenue is recognised to depict the transfer of promised goods or services to customers, in an amount that reflects the consideration the entity expects to be entitled to in exchange. It applies to nearly all contracts with customers, except leases, insurance contracts and financial instruments, which have their own standards.

The standard was issued in May 2014 and has applied since 1 January 2018. It was developed jointly by the International Accounting Standards Board and the US Financial Accounting Standards Board, whose equivalent is Topic 606, and the two are largely the same. It replaced the earlier standards on revenue and construction contracts and several interpretations, which had given limited guidance on complex arrangements such as bundles of goods and services.

• Identify the contract. A contract exists when the parties have approved it, rights and payment terms can be identified, it has commercial substance and it is probable that the entity will collect the consideration.
• Identify the performance obligations. Each promise to transfer a distinct good or service is a separate obligation. A good or service is distinct if the customer can benefit from it on its own or with readily available resources, and the promise is separately identifiable from other promises in the contract.
• Determine the transaction price. This is the amount the entity expects to be entitled to, excluding amounts collected for third parties such as sales taxes.
• Allocate the price. The transaction price is divided among the performance obligations in proportion to their stand-alone selling prices, which are estimated if not directly observable.
• Recognise revenue. Revenue is recognised when, or as, each obligation is satisfied by transferring control of the good or service to the customer.

Where the price can vary because of discounts, rebates, refunds, bonuses or penalties, the entity estimates the variable consideration using either the expected value or the most likely amount, whichever better predicts the outcome. The estimate is included in revenue only to the extent that it is highly probable that a significant reversal will not occur when the uncertainty is resolved, a rule known as the constraint. The price is adjusted for a significant financing component where payment is received well before or after delivery, though this may be ignored when the gap is a year or less.

Revenue is recognised over time if any one of three conditions is met: the customer receives and consumes the benefits as the entity performs, as with routine services; the entity's work creates or enhances an asset that the customer controls as it is created; or the work creates an asset with no alternative use to the entity, and the entity has an enforceable right to payment for work completed to date. Progress is then measured by an output method, such as units delivered, or an input method, such as costs incurred.

If none of the conditions is met, revenue is recognised at the point in time when control passes. Indicators include a present right to payment, legal title, physical possession, transfer of the significant risks and rewards, and customer acceptance.

The standard contains detailed application guidance. An entity that arranges for another party to provide goods or services is an agent and reports only its fee or commission as revenue; a principal, which controls the good or service before transfer, reports the gross amount. A licence of intellectual property is recognised over time if it gives access to the property as it changes during the licence period, and at a point in time if it gives a right to use the property as it exists when granted.

The incremental costs of obtaining a contract, such as sales commissions, are recognised as an asset if the entity expects to recover them, and are amortised as the related goods or services are transferred. Costs of fulfilling a contract are capitalised when they relate directly to it, generate resources used to satisfy it and are expected to be recovered.

When one party has performed, the entity presents a contract asset, a receivable or a contract liability. A contract liability, often called deferred revenue, arises where the customer has paid before the entity has performed. A receivable is an unconditional right to payment and falls under the impairment rules of IFRS 9, as do contract assets. Disclosures include revenue disaggregated into categories, movements in contract balances, the transaction price allocated to obligations not yet satisfied, and the significant judgements made.

The standard had its largest effects in telecommunications, where handsets bundled with service plans are now recognised earlier, and in software, construction, asset management and real estate. Because it rests on judgement about distinct obligations, variable consideration and transfer of control, it has been a frequent subject of regulatory review of financial reporting, and it sits alongside the general revenue recognition principle and the accrual basis of accounting. The related topic of when income is earned is discussed under revenue recognition.

• IFRS Foundation