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.
Paragraph IFRS 15.5 lists contracts to which IFRS 15 does not apply. These are mainly contracts within the scope of other IFRS. Additionally, certain non-monetary exchanges between entities in the same line of business are also excluded from the scope of IFRS 15 (see 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 partially within the scope of IFRS 15 and partially within the scope of other IFRS (a lease with a service contract is given as an example by IFRS 15.BC64), it should be separated and/or initially measured in accordance with the separation and/or measurement requirements set in the other IFRS standard first. In other words, the more specific Standard takes precedence in accounting for a part of a contract and any residual consideration is allocated to the part(s) of the contract within the scope of IFRS 15 (IFRS 15.7 and BC66). IASB acknowledged that the contract separation criteria set out 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 to a portfolio of contracts 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 contracts (e.g. telecommunications and entertainment industries).
More about IFRS 15
See other pages relating to IFRS 15:
Identify a Contract
Performance Obligations and Timing of Revenue Recognition
Principal vs Agent, or Reporting Revenue Gross vs Net
Revenue from Licensing of Intellectual Property
Revenue from Customers’ Unexercised Rights (Breakage)
Customer Loyalty Programmes and Other Options for Additional Goods or Services
Contract Assets and Contract Liabilities