REVENUE FROM CONTRACTS WITH CUSTOMERS (IFRS 15)
Bilal Ahmad
Fractional CFO for Startups | Financial Modeling to Drive Growth and Profitability | Empowering Founders with Data-Driven Financial Leadership
IFRS 15 has replaced the previous IFRS on revenue recognition, IAS 18 Revenue and IAS Construction Contracts. It uses a principles-based 5-step approach to apply to contact with customers.
The five steps are as follows:
1. Identification of contracts
2. Identification of performance obligations (goods, services or a bundle of goods and services)
3. Determination of transaction price
4. Allocation of the price to performance obligations
5. Recognition of revenue when/as performance obligations are satisfied
STEPS EXPLAINED
1. Identification of contracts
The contract does not have to be a written one, it can be verbal or implied. In order for IFRS 15 to apply the following must all be met:
? The contract is approved by all parties
? The rights and payment terms can be identified
? The contract has commercial substance
? It is probable that revenue will be collected
2. Identification of performance obligations
If the goods or services that have agreed to be exchanged under the contract are distinct (i.e. could be sold alone) then they should be accounted for separately.
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If a series of goods or services are substantially the same they are treated as a single performance obligation.
3. Determination of transaction price
The amount the selling party expects to receive is the transaction price. This should consider the following:
? Significant financing components
? Variable consideration
? Refunds ad rebates (paid to the customer!)
4. Allocation of the price
The price is allocated proportionately
5. Recognition of revenue
Once control of goods or services transfers to the customer, the performance obligation is satisfied and revenue is recognised. This may occur at a single point in time, or over a period of time.
If a performance obligation is satisfied at a single point in time, we should consider the following in assessing the transfer of control:
? Present right to payment for the asset
? Transferred legal title to the asset
? Transferred physical possession of the asset
? Transferred the risks and rewards of