The International Accounting Standards Board (IASB), issued IFRS 15 Revenue from Contracts with Customer. Which is effective from 1 January 2017. Earlier application is permitted. IFRS 15 sets out the requirements for recognizing revenue that apply to all contracts with customers (except for contracts that are within the scope of the Standards on leases, insurance contracts and financial instruments).
Why change the requirements for recognizing revenue?
Information about revenue is used to assess a company’s financial performance and position and to compare that company with other companies. However, previous revenue requirements in IFRS and US GAAP made it difficult for investors and analysts (‘investors’) to understand and compare a company’s revenue.
Inconsistencies and weaknesses in previous revenue Standards
Disclosure requirements were inadequate
IFRS 15 addresses those deficiencies by specifying a comprehensive and robust framework for the recognition, measurement and disclosure of revenue. In particular, IFRS 15:
- Improves the comparability of revenue from contracts with customers;
- Reduces the need for interpretive guidance to be developed on a case-by-case basis to address emerging revenue recognition issues; and
- Provides more useful information through improved disclosure requirements.
An overview of IFRS 15—a framework for recognizing revenue
IFRS 15 establishes a comprehensive framework for determining when to recognize revenue and how much revenue to recognize. The core principle in that framework is that a company should recognize revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
To recognize revenue, a company would apply the following five steps:
Step 1: Identify the contract(s) with the customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price
Step 5: Recognize revenue when a performance obligation is satisfied