Revenue from Contracts with Customers (IFRS 15)
IFRS 15 five-step model
This domain tests the five-step model and its judgement areas: distinct performance obligations, variable consideration constraint, transaction-price allocation and whether revenue is recognised over time or at a point in time. A contract exists only if it is enforceable, has commercial substance, collection is probable, and the parties' rights and payment terms can be identified.
- Identify performance obligations: goods or services are distinct if the customer benefits separately and the promise is separately identifiable.
- Transaction price includes variable consideration only to the extent highly probable that no significant reversal will occur; use expected value or most likely amount.
- Allocate on relative standalone selling prices; allocate discounts and variable consideration on a rational basis.
- Recognise over time if the customer controls the asset as created, or the entity creates an asset with no alternative use and has a right to payment for performance to date.
- Measure progress using output or input methods and exclude inefficiencies.
Worked example
An entity sells equipment for 1,000,000 and installs it. Equipment standalone price is 900,000; installation standalone price is 200,000. Total standalone price is 1,100,000. Allocate equipment 1,000,000 × 900/1,100 = 818,182 and installation 181,818. Recognise equipment when control passes and installation over the installation period as the customer receives the service. If installation were not distinct, treat the contract as one performance obligation.
Traps
- Gross versus net: a principal controls the good or service before transfer; an agent recognises commission.
- Assurance-type warranties fall under IAS 37; service-type warranties are separate performance obligations.
- Non-refundable upfront fees are recognised over the contract unless they relate to a distinct good or service.
- Significant financing components adjust consideration unless the practical expedient applies.