Scope of IFRS 15

Last updated: 7 November 2023

IFRS 15 provides a comprehensive framework for recognising revenue arising from contracts with customers. Paragraph IFRS 15.5 details the contracts that fall outside the scope of IFRS 15. Primarily, these contracts are governed by other IFRS standards.

5-step revenue recognition model

Although not explicitly laid out this way within IFRS 15, revenue recognition is frequently presented as a 5-step model:

1. Identify the contract.
2. Identify performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to performance obligations.
5. Recognise revenue as (or when) performance obligations are satisfied.

Non-monetary exchanges facilitating sales

Paragraph IFRS 15.5(d) excludes non-monetary exchanges between businesses operating in the same sector which aid in sales to customers or prospects. This is primarily targeted at sectors with interchangeable products, like oil suppliers. The intention, akin to rules around the commercial substance of a contract, is to prevent companies from inflating revenue. Further discussion can be found in IFRS 15.BC58-BC59.

Contracts partially governed by IFRS 15

If a contract is both within the scope of IFRS 15 and another IFRS standard (for instance, a lease coupled with a service contract as cited in IFRS 15.BC64), then the other IFRS takes precedence. In essence, a more specific standard governs the contract’s separation and measurement, and any remaining consideration is allocated to the performance obligations under IFRS 15 (IFRS 15.7, BC66). The IASB has acknowledged that these criteria for contract separation imply that any overall discount is allocated to the parts within IFRS 15’s scope (IFRS 15.BC66).

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Fixed-fee service contracts

Fixed-fee contracts rely on the occurrence of uncertain events, with roadside assistance programmes and maintenance contracts committing to equipment repairs being prime examples. It’s vital to acknowledge that these contracts align with the definition of insurance contracts (IFRS 17.BC95). However, IFRS 17 permits most fixed-fee service contracts to be governed by IFRS 15 if they satisfy the conditions listed in IFRS 17.8:

• Pricing doesn’t rely on risk assessments of individual customers.
• The contract compensates through providing services rather than direct cash payments.
• The insurance risk mainly stems from the service usage, not the service cost uncertainty.

Interest and dividends

Interest and dividends do not come under the scope of IFRS 15 but are addressed by IFRS 9.

Applying IFRS 15 at a portfolio level

IFRS 15.4 offers a practical expedient allowing entities to implement IFRS 15 to a portfolio of contracts, assuming the expected results of a portfolio approach wouldn’t significantly deviate from accounting for individual contracts. The IASB has clarified that entities aren’t expected to make quantitative assessments for every scenario. Instead, they should adopt a reasonable approach to determine suitable portfolios for their contract types (IFRS 15.BC69). This approach proves invaluable for businesses with numerous similar contracts, such as those in the telecommunications and entertainment sectors.

More about IFRS 15

See other pages relating to IFRS 15: