Contract modifications and variable consideration

IFRS 15 Revenue from Contracts with Customers (contents page is here) introduced a single and comprehensive framework which sets out how much revenue is to be recognised, and when. The core principle is that a vendor should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the vendor expects to be entitled in exchange for those goods or services. See a summary of IFRS 15 here.

A contract modification arises when the parties approve a change in the scope and/or the price of a contract (eg a change order). In IFRS 15 this exercise is part of step 1 Identify the contract. The … Read more

Output method – Measuring progress to completion

IFRS 15 Revenue from Contracts with Customers (contents page is here) introduced a single and comprehensive framework which sets out how much revenue is to be recognised, and when. The core principle is that a vendor should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the vendor expects to be entitled in exchange for those goods or services. See a summary of IFRS 15 here. Output method – Measuring progress to completion

This section is part of step 5 Recognise revenue as or when each performance obligation is satisfied and the sub-step Measuring progress toward complete satisfaction of a performance obligation. Output … Read more

Satisfaction of performance obligations

This is a primary and fundamental subject in the recognition of revenue. There are two ways of recognising revenue, revenue recognition over time and revenue recognition at a point in time. Revenue recognition over time is often referred to as the ‘Percentage of completion‘ method under the (superseded) IAS 11 Construction contracts.

The general principle is the revenue is recognised at a point in time (and as such it is the most common type of sales transaction at least in volume, just think of: a retailer sells a candy bar for cash in the shopping mall). As a result there are three criterion (see below ability, direct the use and obtain benefits from) that have to be … 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 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

Determining when promises are performance obligations

After identifying the promised goods or services within a contract, an entity determines which of those goods or services will be treated as separate performance obligations. That is, the entity identifies the individual units of account. Promised goods or services represent separate performance obligations if the goods or services are distinct (by themselves, or as part of a bundle of goods or services) (see below Determination of ‘distinct’) or if the goods or services are part of a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer (see below Series of distinct goods or …. that are substantially the same and ….. the same Read more