IFRS 15: Revenue from Contracts with Customers

Friday, July 4th, 2014

The IASB has issued a new accounting standard IFRS 15 –Revenue from Contracts with Customers in May 2014 which will replace the existing accounting standards IAS 18 – Revenue and IAS 11- Construction Contracts along with few IFRIC interpretations. IFRS 15 shall be effective retrospectively for reporting period beginning on or after 1 January 2017 but early application is permitted. For entities in the European Union need to wait for the endorsement before it is adopted.  This new accounting standard converge with the USGAAP.

This new accounting standard established a fundamental revenue recognition principle to reflect the transfer of promised 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.  IFRS 15 is more prescriptive in nature as compared to IAS 18 and IAS 11, therefore, may impact many organisation and implementation would require adequate planning and considerations. The revenue recognition principle has been designed based on five step model:

  • Identify the contract(s) with a customer
  • Identify the performance obligations in the contract
  • Determine the transaction price
  • Allocate the transaction price to the performance obligations in the contract
  • Recognize revenue when (or as) the entity satisfies a performance obligation

Where a contract involves multiple performance obligations then the entity shall allocate the transaction price to the performance obligations in the contract by reference to their relative standalone selling prices. If a standalone selling price is not directly observable, the entity will need to estimate it based on below mentioned methods:

  • Adjusted market assessment approach
  • Expected cost plus a margin approach
  • Residual approach (only permissible in limited circumstances).

Some of the other key points to note:

In accordance with IFRS 5, if the overall discount compared to the aggregate of standalone selling prices is allocated between performance obligations on a relative standalone selling price basis. However in some situations, it may be appropriate to allocate such a discount to some but not all of the performance obligations.

If the consideration is paid in advance or in arrears, the entity will need to consider whether the contract includes a significant financing arrangement and, if so, adjust for the time value of money.


The accounting standard requires an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Therefore, it requires disclosure of both qualitative and quantitative information.

Presentation in financial statements

Contracts with customers will be presented in an entity’s statement of financial position as a contract liability, a contract asset, or a receivable, depending on the relationship between the entity’s performance and the customer’s payment.  Similarly, a contract liability is presented in the statement of financial position where a customer has paid an amount of consideration prior to the entity performing by transferring the related good or service to the customer.