Chasing Myths: Common Misapplications of IFRS and Their Implications Myth #7: IFRS 15 Disclosures: Semantics or Substance?

It is still common for many entities reporting under IFRS (including listed entities) to disclose their revenue measurement accounting policy as the "fair value of the consideration received or receivable." However, this accounting policy is incorrect under IFRS 15, which establishes (paragraphs 46 and 47) that revenue must be measured based on the transaction price, which corresponds to the consideration to which the entity is entitled upon transferring control of goods or services to the customer.

It is also common for entities reporting under IFRS to not disclose (or to use “plain vanilla” disclosures) their key performance obligations resulting from the application of IFRS 15. However, performance obligations are the cornerstone of IFRS 15, as everything revolves around them.

Another frequent issue found in revenue-related accounting policy disclosures for contracts with customers is the description of performance obligations as simply "sale of equipment." The performance obligation is not the “sale”! The sale is the event that triggers performance obligations, such as delivering goods to the customer, installing the equipment, or customizing software (note that, depending on the circumstances, these examples may not constitute distinct performance obligations). If the sale itself was considered the performance obligation, the corresponding revenue would be recognized on the date of the sale, as it would generally be satisfied at that moment.

Another (unfortunately) very common issue in revenue-related accounting policy disclosures for contracts with customers relates to how the five steps of the IFRS 15 revenue recognition model are described. For example, it is very common for Step 1 to be labeled as “Identification of the contract.” While this phrase appears as a section title in the standard itself, its scope is much broader than the wording might suggest. The purpose of this step is not merely to determine whether a contract exists but rather to assess whether a contract with a customer, as defined by IFRS 15, exists. This distinction is critical. There may be formal contracts that do not qualify as contracts with customers under IFRS 15 (for example, because they lack economic substance or fail to meet the collectability threshold), meaning they fall outside the scope of the standard.

Another paradigmatic example of these imprecise designations relates to Step 5, which is often simply described as “revenue recognition.” Stating it this way renders the step meaningless, as it is obvious that revenue must be recognized. The purpose of Step 5 is to determine when revenue should be recognized for each distinct performance obligation identified in Step 2.

Below are my suggested designations for the five steps of the #IFRS 15 revenue recognition model:

• Step 1 – Confirm that the arrangement qualifies as a contract with a customer under IFRS 15 (if it does not, the contract falls outside the scope of IFRS 15, and the subsequent steps do not apply).
• Step 2 – Identify the distinct performance obligations arising from the contract with the customer.
• Step 3 – Determine the transaction price corresponding to the contract with the customer.
• Step 4 – Allocate the transaction price to the distinct performance obligations identified.
• Step 5 – Determine the timing of revenue recognition for each distinct performance obligation identified.

These aspects may seem like mere semantics. However, they can have a much deeper (and more troubling) meaning. In other words, they may indicate that IFRS 15 has not actually been implemented, and that the entity is still trapped in the mindset of IAS 18.

I will leave financial reporting professionals from entities exhibiting some (or all) of the issues listed in this text with a rhetorical question: Did anything change with the adoption of IFRS 15? Because it should have changed—sometimes significantly!

Finally, I would like to emphasize that the adoption of IFRS 15 (as well as other standards) necessarily requires a deep diagnosis of the entity’s various revenue sources and commercial practices. Only through such an analysis can the #revenue recognition model outlined in this standard be rigorously implemented.

Feel free to contact me if you have any questions related to IFRS 15.