IFRS 15 Revenue from customer contracts

In accounting, revenue is the income that a business has from its normal business activities, usually from the sale of goods and services to customers. This is a sub-category of IFRS 15 Revenue from Contracts with Customers relating to the general narratives specific to all industries

Implied price concession or Impairment loss

There is a significant difference in accounting for a price concession and an impairment loss. And we are not even close, it is even worse….

What about an implied price concession?

Construction companies have a certain capacity of daily production/construction – OK, there is some flexibility by hiring temporary construction workers, but there is an end to that – ‘They are never there when you need them’. As a result construction companies with a small sales funnel or an irregular distribution over time in working on the live construction contracts may be willing to offer an implied price concession to win a construction contract to avoid a larger loss in not filling their (minimum) capacity. Implied price concession or ImpairmentRead more

Construction contracts – Measuring progress

This part relates to a complete explanation of IFRS 15 Revenue from contracts with customers in respect of Engineering & Construction contracts, see Revenue from Engineering & Construction contracts.


When a performance obligation is satisfied over time, the standard provides two types of methods for measuring progress under the contract: input methods or output methods. The standard requires an entity to select a single measurement method for the relevant performance obligations that best depicts the entity’s performance in transferring goods or services and it does not allow a change of method. That is, a performance obligation must be accounted for under the method the entity selects (i.e., either an input or output method) until it has … Read more

Contract enforceability and termination clauses

An entity has to determine the duration of the contract (i.e., the stated contractual term or a shorter period) before applying certain aspects of the revenue model (e.g., identifying performance obligations, determining the transaction price). The contract duration under IFRS 15 is the period in which parties to the contract have present enforceable rights and obligations. An entity cannot assume that there are present enforceable rights and obligations for the entire term stated in the contract and it is likely that an entity will have to consider enforceable rights and obligations in individual contracts, as described in IFRS 15 11. Contract enforceability and termination clauses

The period in which enforceable rights and obligations exist may be affected … Read more

Contract costs

IFRS 15 specifies the accounting treatment for costs an entity incurs to obtain and fulfil a contract to provide goods or services to customers as discussed below. An entity only applies these requirements to costs incurred that relate to a contract with a customer that is within the scope of IFRS 15.

When an entity recognises capitalised contract costs under IFRS 15, any such assets must be presented separately from contract assets and contract liabilities in the statement of financial position or disclosed separately in the notes to the financial statements (assuming they are material).Contract costs Contract costs

Furthermore, entities must consider the requirements in IAS 1 on classification of current assets when determining whether their contract cost assets are presented as … Read more

Warranties

Warranties are commonly included in arrangements to sell goods or services. They may be explicitly included in the contractual arrangement with a customer or may be required by law or regulation. In addition, an entity may have established an implicit policy of providing warranty services to maintain a desired level of satisfaction among its customers. Whether explicit or implicit, warranty obligations extend an entity’s obligations beyond the transfer of control of the good or service to the customer, requiring it to stand ready to perform under the warranty over the life of the warranty obligation. Warranties in arrangements to sell goods or services Warranties in arrangements to sell goods or services

The price of a warranty may be … Read more

Royalty income intellectual property

IFRS 15 provides application guidance on the recognition of revenue for sales-based or usage-based royalties on licences of intellectual property, which differs from the requirements that apply to other revenue from licences.

IFRS 15 B63 requires that royalties received in exchange for licences of intellectual property are recognised at the later of when:Royalty income intellectual property

(a) The subsequent sale or usage occurs.

and

(b) The performance obligation to which some or all of the sales-based or usage-based royalty has been allocated is satisfied (or partially satisfied).

That is, an entity recognises the royalties as revenue for such arrangements when (or as) the customer’s subsequent sales or usage occurs, unless that pattern of recognition accelerates revenue recognition ahead of the entity’s … Read more

Satisfaction of performance obligations

Under IFRS 15, an entity only recognises revenue when it satisfies an identified performance obligation by transferring a promised good or service to a customer. A good or service is considered to be transferred when the customer obtains control.

IFRS 15 states that “control of an asset refers to the ABILITY to DIRECT THE USE OF and OBTAIN substantially all of THE remaining BENEFITS FROM the asset”. [IFRS 15 33]

The IASB explained the key terms in the definition of control in the Basis for Conclusions, as follows: [IFRS 15 BC 118] Satisfaction of performance obligations

  • Ability — a customer must have the present right to direct the use of, and obtain substantially all of
Read more

Determining stand-alone selling prices

To allocate the transaction price on a relative stand-alone selling price basis, an entity must first determine the stand-alone selling price of the distinct good or service underlying each performance obligation. Under the standard, this is the price at which an entity would sell a good or service on a stand-alone (or separate) basis at contract inception.

IFRS 15 indicates the observable price of a good or service sold separately provides the best evidence of stand-alone selling price. However, in many situations, stand-alone selling prices will not be readily observable. In those cases, the entity must estimate the stand-alone selling price. The standard includes the requirements on estimating stand-alone selling prices in IFRS 15 78 – 80. Determining Read more

Step 1 Identify the contract with the customer

IFRS 15 The revenue recognition standard provides a single comprehensive standard that applies to nearly all industries and has changed revenue recognition quite significant.

IFRS 15 introduced a five step process for recognising revenue, as follows:Step 1 Identify the contract with the customer

      1. Identify the contract with the customer
      2. Identify the performance obligations in the contract
      3. Determine the transaction price for the contract
      4. Allocate the transaction price to each specific performance obligation
      5. Recognise the revenue when the entity satisfies each performance obligation


The first step of identifying the contract with the customer may sound easy as we all know when we have a contract in place, right?

IFRS 15 has some nuances which make this more complicated than it may seem. This new standard defines a contract … Read more

Step 2 Identify the performance obligations in the contract

IFRS 15 The revenue recognition standard provides a single comprehensive standard that applies to nearly all industries and has changed revenue recognition quite significant.

IFRS 15 introduced a five step process for recognising revenue, as follows: Step 2 Identify the performance obligations in the contract

    1. Identify the contract with the customer
    2. Identify the performance obligations in the contract
    3. Determine the transaction price for the contract
    4. Allocate the transaction price to each specific performance obligation
    5. Recognise the revenue when the entity satisfies each performance obligation


Step two, identifying the performance obligations in the contract, is a critical step because it impacts both how much revenue will be recognised, as well as when a company can record revenue. Identify the performance obligations in the contract Identify the performance obligations Read more