Revenue (IFRS 15)

What IFRS 15 does

IFRS 15 Revenue from Contracts with Customers sets one model for recognising revenue across almost every industry. Revenue is recognised when control of goods or services passes to the customer, at the amount the entity expects to be entitled to.

The five-step model

1. Identify the contract. It must be approved, create enforceable rights, have commercial substance and payment must be probable.
2. Identify the performance obligations. Each distinct good or service is a separate obligation. A good or service is distinct if the customer can benefit from it on its own and it is separately identifiable in the contract.
3. Determine the transaction price. Include variable consideration (only to the extent a significant reversal is highly unlikely), adjust for a significant financing component, and exclude amounts collected for third parties.
4. Allocate the price. Split the transaction price across the obligations based on their relative stand-alone selling prices.
5. Recognise revenue. At a point in time when control passes, or over time if one of the over-time criteria is met.

A short example

A company sells equipment with two years of servicing for $120,000. Sold separately, the equipment is $100,000 and the servicing is $50,000, a total of $150,000. The price is allocated in proportion: equipment $80,000 ($120,000 × 100/150) and servicing $40,000 ($120,000 × 50/150). Equipment revenue is recognised on delivery; servicing revenue is recognised over the two years, $20,000 a year.

What SBR examiners look for

SBR rarely asks you to list the five steps. It gives you a contract with a twist, such as a bundled sale, a bonus that depends on future events, a licence, or a sale with a repurchase option, and asks how much revenue to recognise and why. Strong answers:

• name the step that matters in the scenario, not all five;
• apply the rule to the facts and give the figure;
• explain the effect on profit and on the statement of financial position.

Common mistakes

• Recognising the full price upfront when part of it relates to future services.
• Including variable consideration that is not highly probable.
• Forgetting that a contract modification may create a separate contract.