Revenue Recognition and Contracts with Customers
IFRS 15 uses a five-step model: identify the contract with a customer; identify the performance obligations; determine the transaction price; allocate the transaction price to the performance obligations; and recognise revenue when (or as) each obligation is satisfied. Candidates must understand the criteria for a contract to exist (approval, identifiable rights, payment terms, commercial substance, and probable collection), and the distinction between a performance obligation satisfied at a point in time versus over time. Over-time recognition applies where the customer simultaneously receives and consumes benefits, the entity's performance creates or enhances an asset the customer controls, or the performance does not create an asset with an alternative use and the entity has an enforceable right to payment for performance to date.
Traps
Common traps include variable consideration (estimate using expected value or most likely amount, constrained to the amount highly probable not to reverse), significant financing components (adjust if the period exceeds one year, with practical expedients), principal versus agent (control, not merely risk, determines gross versus net), and contract costs (incremental costs of obtaining a contract capitalised if recoverable). Watch for licences (right to access versus right to use), warranties (assurance versus service), non-refundable upfront fees, and the allocation of discounts and variable consideration to specific obligations. Also know the presentation rules: contract assets versus receivables versus contract liabilities.
Worked example / rule of thumb
A contract has a fixed price of $1,000,000 plus a bonus of $100,000 payable if a milestone is met. The entity assesses an 80% chance of meeting it. Expected value = $80,000; because it is highly probable not to reverse, include it: transaction price $1,080,000. Rule of thumb: allocate the transaction price on relative stand-alone selling prices; use the residual approach only where prices are highly variable or uncertain.