International Financial Reporting Standard IFRS 15, Revenue from Contracts with Customers, sets out a sequential process that an entity applies to each contract with a customer to determine when, and how much, revenue to recognise. The process begins with identifying the contract itself, moves through identifying performance obligations and determining and allocating the transaction price, and ends with recognising revenue as control of the good or service transfers to the customer.
First: Identifying the Contract with a Customer
An entity accounts for a contract with a customer within the scope of the Standard only when a set of criteria is met together at contract inception, including:
- The parties have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their obligations.
- Each party's rights regarding the goods or services to be transferred can be identified.
- The payment terms for the goods or services can be identified.
- The contract has commercial substance, meaning the risk, timing or amount of the entity's future cash flows is expected to change as a result of the contract.
- It is probable that the entity will collect the consideration to which it will be entitled.
If these criteria are not met together, revenue is not recognised for the contract except in specific circumstances set out in the Standard.
Second: Identifying Distinct Performance Obligations
At contract inception, an entity assesses the promised goods or services and identifies as a performance obligation each promise to transfer a distinct good or service (or bundle of distinct goods or services), or a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer.
Third and Fourth: Determining and Allocating the Transaction Price
The transaction price is the amount of consideration an entity expects to be entitled to in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. Once determined, the transaction price is allocated to each distinct performance obligation in an amount that depicts the consideration the entity expects to be entitled to for transferring those goods or services, generally on a relative stand-alone selling price basis.
Fifth: Recognising Revenue as Performance Obligations Are Satisfied
An entity recognises revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer; an asset is transferred when the customer obtains control of it. Revenue may be recognised over time if the performance meets one of the criteria the Standard sets out (for example, the customer simultaneously receives and consumes the benefits as the entity performs); otherwise revenue is recognised at a point in time when control transfers.
Legal References
- IFRS 15 — Revenue from Contracts with Customers, paragraph 9 (criteria for accounting for a contract).
- IFRS 15, paragraph 22 (identifying a performance obligation).
- IFRS 15, paragraph 47 (definition of the transaction price).
- IFRS 15, paragraph 73 (objective of allocating the transaction price).
- IFRS 15, paragraph 31 (recognising revenue on transfer of control).
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