5-step revenue recognition model
Revenue recognition under IFRS 15 is often presented as a 5-step model as shown below, although IFRS 15 itself does not follow these steps directly:
- Identify the contract.
- Identify performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to performance obligations.
- Recognise revenue when/as performance obligations are satisfied.
IFRS 15 is a comprehensive standard covering revenue from contracts with customers. A contract is an agreement between two or more parties that creates enforceable rights and obligations. A customer is a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.
Paragraph IFRS 15.5 lists contracts to which IFRS 15 does not apply. These are mainly contracts within the scope of other IFRS and additionally non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers that are covered below.
Non-monetary exchanges between entities in the same line of business to facilitate sales
Paragraph IFRS 15.5(d) excludes from the scope of IFRS 15 non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers. This requirement is designed to apply to companies operating in industries where products are indistinguishable, such as oil supplies. Similarly to a requirement relating to commercial substance of the contract, scope exclusion in IFRS 15.5(d) is aimed at preventing entities from recognising ‘artificial’ revenue (see also IFRS 15.BC58-BC59).
Contracts only partially in the scope of IFRS 15
When a contract is only partially in the scope of IFRS 15, it should be separated as stated in IFRS 15.7. Example given by IFRS 15 is a lease with a service contract. IASB acknowledged that the contract separation criteria in IFRS 15.7 result in any discount in the overall arrangement being allocated to the portion of the arrangement within the scope of IFRS 15 (IFRS 15.BC66).
Fixed-fee service contracts
A fixed-fee service contract is a contract in which the level of service depends on an uncertain event. Examples include roadside assistance programmes and maintenance contracts in which the service provider agrees to repair specified equipment after a malfunction. It is important to note that such contracts meet the definition of insurance contracts (IFRS 17.BC95). Fortunately, IFRS 17 allows to apply IFRS 15 to vast majority of fixed-fee service contracts provided by non-insurance companies if the criteria set out in paragraph IFRS 17.8 are met.
Interest and dividends
Interest and dividends are not in the scope of IFRS 15, they are covered in IFRS 9.
Applying IFRS 15 at a portfolio level
IFRS 15.4 introduces a practical expedient that allows applying IFRS 15 at a portfolio level provided that the entity reasonably expects that the effects of adopting portfolio approach would not differ materially from applying IFRS 15 to the individual contracts. IASB indicated that it did not intend for an entity to quantitatively evaluate each outcome and, instead, the entity should be able to take a reasonable approach to determine the portfolios that would be appropriate for its types of contracts (IFRS 15.BC69). Portfolio approach can be particularly useful for entities with large number of fairly homogeneous contract (e.g. telecommunications and entertainment industries).
More about IFRS 15
See other pages relating to IFRS 15:
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Excerpts from IFRS Standards come from the Official Journal of the European Union (© European Union, https://eur-lex.europa.eu). The information provided on this website does not constitute professional advice and should not be used as a substitute for consultation with a certified accountant.