IFRS 15, Revenue from Contracts with Customers, is a new standard that outlines a single comprehensive framework for entities to use in accounting for revenue arising from contracts with customers. It supersedes current revenue recognition guidance including IAS 18 – Revenues, IAS 11 – Construction Contracts and related interpretations.
The core principle of IFRS 15 is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This core principle is delivered in a five-step model:
- Identify the contract(s) with a customer
- Identify the performance obligations in the contract(s)
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- Recognize revenue when (or as) the entity satisfies a performance obligation
IFRS 15 also includes a cohesive set of disclosure requirements that significantly expands the current disclosure requirements related to revenue recognition.
Below is the brief description of 5 steps to recognize revenue:
Step 1: Identify contract(s) with customer
A contract creates enforceable rights and obligations. It may be written, oral, or implied by customary business practice.
Step 2: Identify separate performance obligations in the contract(s)
Performance obligations are promises in a contract to transfer goods or services, including those a customer can resell or provide to its customer.
Step 3: Determine the transaction price
Transaction price is the amount of the consideration company is entitled to receive in exchange for transferring goods or services to customers.
Step 4: Allocate the transaction price
Transaction price should be allocated to distinct performance obligations based on relative standalone selling price.
Step 5: Recognize revenue when the performance obligation is satisfied
Recognize revenue when the promised goods or services are transferred to the customer and the customer obtains control.