International Financial Reporting Standard 15 (IFRS 15) is a new accounting standard that provides guidance on how to account for revenue from contracts with customers. IFRS 15 replaces the previous revenue recognition standards, including IAS 18, “Revenue,” and IAS 11, “Construction Contracts,” and is effective for annual periods beginning on or after January 1, 2018.
IFRS 15 establishes a single, principles-based five-step model for recognizing revenue from contracts with customers. The five steps are:
- Identify the contract with the customer.
- Identify the performance obligations in the contract.
- 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.
The first step in applying IFRS 15 is to identify the contract with the customer. A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations. A contract with a customer exists when the entity has approved the contract and the customer has accepted the offer to enter into the contract.
The second step is to identify the performance obligations in the contract. A performance obligation is a promise to transfer a good or service to the customer in the contract. The entity should assess the contract to determine which promises are performance obligations, and which promises are not.
The third step is to determine the transaction price. The transaction price is the amount of consideration to which the entity expects to be entitled in exchange for transferring the goods or services to the customer. The transaction price should be determined based on the contract, using the expected value of the consideration that the entity expects to receive from the customer.
The fourth step is to allocate the transaction price to the performance obligations in the contract. The transaction price should be allocated to each performance obligation in the contract based on the relative standalone selling prices of the goods or services promised in the contract. The standalone selling price is the price at which the entity would sell the good or service separately to the customer.
The fifth and final step is to recognize revenue when (or as) the entity satisfies a performance obligation. The entity should recognize revenue when it satisfies a performance obligation by transferring a good or service to the customer. This means that the entity should recognize revenue when it completes the performance obligation, or when it receives payment from the customer, whichever comes first.
IFRS 15 includes detailed guidance on how to apply the five-step model in various situations, including contracts with multiple performance obligations, contracts with variable consideration, and contracts with non-cash consideration.