IFRS 15 Revenue from Contracts with Customers

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Overview

The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) (collectively, the Boards) have jointly issued a new revenue standard, IFRS 15 Revenue from Contracts with Customers, that will supersede virtually all revenue recognition requirements in IFRS and US GAAP.

IFRS 15 specifies the accounting treatment for all revenue arising from contracts with customers. It applies to all entities that enter into contracts to provide goods or services to their customers, unless the contracts are in the scope of other IFRSs, such as IAS 17 Leases. The standard also provides a model for the measurement and recognition of gains and losses on the sale of certain non-financial assets, such as property or equipment.

Effective date

IFRS 15 is effective for annual periods beginning on or after 1 January 2017. Early adoption is permitted for IFRS preparers, provided that fact is disclosed, and for first-time adopters of IFRS

What industries will be the most affected?

For some companies, the impact of the new rules for revenue recognition will be minimal and they will simply continue recognizing revenue just as before. However, some companies might face difficult challenges in order to apply the new rules. The biggest challenges will be mainly in the areas that are not very precisely arranged by IAS 18 and other related standards.

As opposed to existing guidance, IFRS 15 gives you much less room for your own accounting decisions and specifies a lot more things.

The biggest areas of impact are probably:

  • Is the revenue recognized over time (spread between the periods during contract duration) or at the point of time (upon completion)?
  • If the revenue is to be recognized over time, how should the company measure the progress towards completion (previously “stage of completion”)?
  • How shall companies account for revenue from bundled offers (with multiple deliverables)? Should they split the contract into several components?
  • How shall companies deal with contract modifications?
  • How shall companies treat the contract costs, including cost of obtaining the contract? Shall they expense these costs in profit or loss, or capitalize and defer?
  • Are there any financing components in the contract? If yes, how to deal with the time value of money?
  • What disclosures do companies need to make? Do they have all the appropriate and relevant information?
Revenue recognition
IFRS 15 outlines the principles an entity must apply to measure and recognize revenue and the related cash flows. The core principle is that an entity will recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to a customer.
The principles in IFRS 15 will be applied using the following five steps:

1: Identify the contract(s) with a customer
2: Identify the performance obligations in the contract (*)
3: Determine the transaction price
4: Allocate the transaction price to the performance obligations in the contract
5: Recognize revenue when (or as) the entity satisfies a performance obligation

(*) IFRS 15 states very precise and detailed guidance on whether the goods or services promised under the contract are distinct and whether they can be considered separate performance obligations or not.
An entity will need to exercise judgement when considering the terms of the contract(s) and all of the facts and circumstances, including implied contract terms. An entity also will have to apply the requirements of the standard consistently to contracts with similar characteristics and in similar circumstances.
Different sectors or industries are affected in many different ways along the 5-step model. In our view, the following industries will face probably the biggest challenges:
  • Telecommunications
  • Manufacturers
  • Real estate and property development
  • Software development and technology
This publication highlights key aspects of IFRS 15. Please contact our IFRS experts at “info@astuteme.com” to discuss about any specific matter of your concern.