What You Should Know About IFRS 15

What is IFRS 15?

IFRS 15 is a mandatory standard effective for periods beginning on or after 1 January 2018. Earlier application of the principals and requirements is permitted.

The facts

• The new standard replaces existing IFRS revenue recognition guidance
• May result in a substantial change in the amount and timing of revenue recognition
• Significantly more qualitative and quantitative disclosures are required

The impacts

• Revenue from bundled goods and services requires separation and may result in deferring or accelerating revenue
• The provision of incentives to purchase (e.g. free goods or services provided as part of a sale) may require separation
• Modifications to long term contracts are likely to take place over the contract term
• Explicit guidance on the treatment of licenses may change the timing of revenue recognition
• The guidance on contract costs is expected to result in the recognition of more assets
• The new standard focuses on the identification of performance obligations and distinguishes between performance obligations that are satisfied ‘at a point in time’ and those that are satisfied ‘over time’ which is determined by which the control of goods and services passes to the customer

Scope

Applies to all contracts with customers, except for those in the scope of other IFRSs;

• Lease contracts (refer to IAS 17)
• Insurance contracts (refer to IFRS 4)
• Financial instruments and other contractual rights or obligations (refer to IFRS 9/IAS 39, IFRS 10, IFRS 11, IAS 27, and IAS 28)
• Non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers. 

Core principle

Recognise revenue 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.

This core principle is delivered in a five-step model framework.

The ‘5 step’ Model

Revenue from contracts with customers is recognised based on the application of a principle-based ‘five step’ model: 

1. Identify the contract
2. Identify separate performance obligations
3. Determine the transaction price
4. Allocate the transaction price to performance obligations
5. Recognise revenue when each performance obligation is satisfied

Presentation

Statement of financial position - Contract assets and contract liabilities from customers are presented separately - Unconditional rights to consideration are presented separately as a receivable.

Statement of profit or loss and other comprehensive income - Line items (revenue and impairment) are presented separately in accordance with the requirements of IAS 1 Presentation of Financial Statements.

Disclosure

Overall objective to disclose sufficient information to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity’s contracts with customers.

Significant judgements: - Performance obligation satisfaction - Transaction price (incl. allocation) - Determining contract costs capitalised.

Contract costs capitalised: - Method of amortisation - Closing balances by asset type - Amortisation and impairment.

Contracts with customers (information regarding): - Disaggregation of revenue - Contract assets and contract liabilities - Performance obligations (incl. remaining).

Use of practical expedients (related to): - Significant financing component (12 month) - Contract costs (12-month amortisation).