IFRS 15 - Revenue from Contracts with Customers

1. Core Principle

The core principle of IFRS 15 is that an entity recognizes revenue when it transfers control of a good or service to a customer, in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. This approach emphasizes the transfer of control rather than merely the transfer of risks and rewards.

2. Five-Step Model

IFRS 15 outlines a five-step model for recognizing revenue, which entities must follow:

• Step 1: Identify the Contract(s) with a Customer - A contract is an agreement between two parties that creates enforceable rights and obligations. Entities must assess whether the contract meets specific criteria for revenue recognition.
• Step 2: Identify the Performance Obligations - Performance obligations are the distinct goods or services that a customer has contracted to receive. Entities must identify each performance obligation in the contract.
• Step 3: Determine the Transaction Price - The transaction price is the amount of consideration an entity expects to receive in exchange for transferring promised goods or services. This step may involve variable consideration, significant financing components, and non-cash consideration.
• Step 4: Allocate the Transaction Price - The transaction price must be allocated to the identified performance obligations based on their relative standalone selling prices. This ensures that revenue is recognized in a manner that reflects the transfer of value to the customer.
• Step 5: Recognize Revenue when Performance Obligations are Satisfied - Revenue is recognized when the entity satisfies a performance obligation by transferring control of a good or service to the customer. This can occur at a point in time or over time, depending on the nature of the performance obligation.

3. Contract Modifications

IFRS 15 provides guidance on how to account for modifications to existing contracts, which may change the scope or price of the contract. Entities must determine whether the modification should be treated as a separate contract or as part of the existing contract.

4. Disclosure Requirements

To enhance transparency, IFRS 15 requires extensive disclosures related to revenue recognition, including:

• Disaggregation of Revenue: Entities must disclose revenue in a way that highlights the various sources of revenue, which may include geographical regions, product lines, or customer types.
• Contract Balances: Information about contract assets, contract liabilities, and the changes in those balances during the reporting period.
• Significant Judgments: Entities must disclose significant judgments made in applying the revenue recognition principles, including any assumptions used to estimate the transaction price or determine performance obligations.
• Practical Expedients: If applicable, entities can disclose the use of practical expedients related to the accounting for contracts with customers.

5. Overall Impact

The implementation of IFRS 15 significantly enhances the consistency and transparency of revenue recognition across various industries. By providing a clear framework for identifying performance obligations and recognizing revenue, the standard helps stakeholders—including investors, analysts, and regulators—better understand an entity’s revenue-generating activities. This clarity ultimately fosters trust in the financial reporting process and supports informed decision-making.