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Revenue & income · IFRS 15

IFRS 15 Revenue from Contracts with Customers

Summary, key points, exam traps and a worked example — written for ICAP, ACCA, ICAI, CIMA and ICAEW students.

On this page
  1. Objective
  2. Scope
  3. Key definitions
  4. Recognition & measurement
  5. Key disclosures
  6. Common exam traps
  7. Worked example
  8. Related standards
  9. Practise MCQs

Objective

Sets out a single five-step model for recognising revenue that reflects the transfer of promised goods or services to customers at the amount the entity expects to be entitled to.

Scope

  • All contracts with customers except leases (IFRS 16), insurance contracts, financial instruments (IFRS 9 etc.) and certain non-monetary exchanges between entities in the same line of business.

Key definitions

Contract
An agreement between two or more parties that creates enforceable rights and obligations.
Performance obligation
A promise to transfer a distinct good or service (or a series of substantially the same distinct goods or services).
Transaction price
The consideration the entity expects to be entitled to in exchange for transferring goods or services, excluding amounts collected for third parties (e.g. sales tax).
Stand-alone selling price
The price at which an entity would sell a promised good or service separately to a customer.
Contract asset / contract liability
A contract asset is a right to consideration for goods transferred that is conditional on something other than time; a contract liability is an obligation to transfer goods for which consideration has been received or is due.

Recognition & measurement

The five steps

  • Step 1 – Identify the contract: approved, rights and payment terms identifiable, commercial substance, and collection probable.
  • Step 2 – Identify performance obligations: each distinct good or service (capable of being distinct and distinct in the context of the contract).
  • Step 3 – Determine the transaction price, including variable consideration (expected value or most likely amount), constrained to the extent it is highly probable there will be no significant reversal; adjust for significant financing components, non-cash consideration and consideration payable to the customer.
  • Step 4 – Allocate the price to performance obligations based on relative stand-alone selling prices (estimated where not observable).
  • Step 5 – Recognise revenue when (or as) each performance obligation is satisfied, i.e. when control transfers.

Over time or at a point in time

  • Over time if any one applies: the customer simultaneously receives and consumes the benefits; the entity's work creates or enhances an asset the customer controls; or the asset has no alternative use to the entity and it has an enforceable right to payment for work done to date.
  • Otherwise at a point in time, considering indicators such as right to payment, legal title, physical possession, risks and rewards, and customer acceptance.
  • Progress over time is measured using output or input methods.

Contract costs and other points

  • Incremental costs of obtaining a contract (e.g. sales commission) are capitalised if expected to be recovered; a practical expedient allows expensing if amortisation would be one year or less.
  • Costs to fulfil a contract are capitalised if not covered by another standard and they relate directly to the contract, generate resources and are expected to be recovered.
  • Principal (gross revenue) vs agent (net commission) depends on whether the entity controls the good or service before transfer.
  • Assurance-type warranties follow IAS 37; service-type warranties are separate performance obligations.

Key disclosures

  • Revenue disaggregated into categories showing how economic factors affect it.
  • Contract balances (receivables, contract assets and liabilities) and significant changes.
  • Performance obligations and the transaction price allocated to remaining performance obligations.
  • Significant judgements in applying the standard.

Common exam traps

  • A sales commission paid only if a contract is won is an incremental cost; bonuses based on overall targets usually are not contract-specific.
  • Variable consideration is included only to the extent a significant reversal is highly probable not to occur.
  • Allocating a discount: normally proportionate across all obligations, unless evidence shows it relates to specific ones.
  • An agent recognises only its commission as revenue.

Worked example: Allocating the transaction price

Scenario. An entity sells equipment with a two-year service contract for $100,000. Stand-alone selling prices are $90,000 for the equipment and $30,000 for the service. The equipment is delivered on day one.

  1. Total stand-alone selling prices = 90,000 + 30,000 = $120,000.
  2. Equipment = 100,000 × 90/120 = $75,000 → recognise on delivery.
  3. Service = 100,000 × 30/120 = $25,000 → recognise over two years ($12,500 a year).

Answer: Year 1 revenue = 75,000 + 12,500 = $87,500; contract liability $12,500 at the end of Year 1.

Practise MCQs on this standard

Test your understanding of IFRS 15 with free chapter-wise MCQs and explanations in these question banks.

CAF-1 Financial Accounting and ReportingICAP CAFACCA FA Financial AccountingACCAACCA FR Financial ReportingACCACAF-6 Corporate ReportingICAP CAFCIMA BA3 Fundamentals of Financial AccountingCIMA Certificate in Business AccountingICAEW AF Accounting FundamentalsICAEW ACA Certificate LevelCA Inter P1 Advanced AccountingICAI CA Intermediate

ICAI CA Intermediate examines Indian Accounting Standards, which are based on but can differ from IFRS. Check your syllabus.

Read the official IFRS 15 text on ifrs.org