Reporting the financial performance of a range of entities (C8.1)

IFRS 15 Revenue from Contracts with Customers (Part 1)

IFRS 15 requires revenue to be recognized when goods or services are transferred to customers, reflecting the consideration expected. The standard uses a five-step model to guide revenue recognition. It ensures revenue matches the value of promised goods or services delivered.

Five-Step Revenue Recognition Model

1. Identify the Contract with the Customer

A contract must be enforceable, have commercial substance, and be approved by all parties.
Example: A written agreement to deliver products for a fixed price.
Combine Contracts: Multiple contracts may be treated as one if closely related.

2. Identify the Performance Obligations

Identify distinct goods or services (unbundling).
Example: A mobile phone contract includes the phone (hardware) and the network service (connection).
If not distinct, bundle goods/services until a distinct obligation is identified.

3. Determine the Transaction Price

The total consideration expected, excluding third-party amounts like taxes.
Example: A service contract with performance bonuses based on completion time.
Variable Consideration: Use the expected value or most likely amount and ensure it passes the ‘revenue reversal’ test.
Consider non-cash considerations, customer payables, and significant financing components if applicable.

4. Allocate the Transaction Price

Allocate based on the standalone selling prices of distinct obligations.
Example: For a bundled sale of a phone and network, allocate the price proportionately to each obligation.
Adjust allocation for discounts or variable amounts if specific conditions apply.

5. Recognise Revenue as Performance Obligations are Satisfied

Revenue is recognized when control of goods or services is transferred.
- Over Time: If the customer benefits simultaneously, controls the asset being created, or the asset has no alternative use and payment is enforceable.
- At a Point in Time: If none of the above applies.
Example: A construction contract may recognize revenue over time, while a product sale may recognize at delivery.

Additional Considerations

Incremental costs to obtain/fulfill contracts can be capitalized.
Guidance applies to licenses, warranties, rights of return, principal-agent considerations, and breakage.
Focus on understanding principles for practical applications in exams.

Summary with Example

Contract: A customer agrees to purchase software and installation services for $10,000.
Step 1: Identify the contract.
Step 2: Separate the software (distinct) and installation services (distinct).
Step 3: Transaction price = $10,000.
Step 4: Allocate $8,000 to software (standalone price) and $2,000 to services.
Step 5: Recognise $8,000 when the software is delivered (point in time) and $2,000 over the installation period (over time).

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