IFRS 15, or the International Financial Reporting Standard 15, is a global accounting standard that provides guidance on the recognition, measurement, and disclosure of revenue from contracts with customers. It was issued by the International Accounting Standards Board (IASB) and became effective for annual reporting periods beginning on or after January 1, 2018.
The standard introduces a five-step approach to revenue recognition, aiming to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Here are the five steps:
- Identify the Contract with the Customer:
- A contract is an agreement between two or more parties that creates enforceable rights and obligations.
- The parties must have approved the contract and be committed to fulfilling their respective obligations.
- Identify the Performance Obligations in the Contract:
- A performance obligation is a promise to transfer a distinct good or service to the customer.
- Some contracts may have multiple performance obligations.
- Determine the Transaction Price:
- The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.
- It may include fixed amounts, variable amounts, or both.
- Allocate the Transaction Price to the Performance Obligations:
- If a contract has multiple performance obligations, the transaction price is allocated to each performance obligation based on its standalone selling price.
- The standalone selling price is the price at which an entity would sell a promised good or service separately to a customer.
- Recognize Revenue when (or as) the Entity Satisfies a Performance Obligation:
- Revenue is recognized when the entity satisfies a performance obligation by transferring control of a good or service to the customer.
- This may occur over time or at a point in time, depending on the nature of the performance obligation.
IFRS 15 is applicable to a wide range of industries and has a significant impact on financial reporting, particularly for industries with complex revenue recognition practices such as software, telecommunications, construction, and long-term service contracts. Entities are required to provide more informative, relevant, and comparable information about revenue and cash flows arising from contracts with customers.