IFRS 15 Revenue from Contracts with Customers
The main objective of IFRS 15 is to offer a single, comprehensive framework for recognizing revenue from customer contracts, promoting consistency and comparability in financial reporting across different sectors and markets.
The principles outlined in IFRS 15 govern the manner in which an entity presents data on the characteristics, quantity, timing, and level of uncertainty surrounding revenue and cash flows originating from a customer agreement. Applying IFRS 15, an entity recognizes revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
As of 1 January 2018, the implementation of the new regulations regarding revenue recognition has come into effect. These regulations have replaced the previous standards for revenue recognition (IAS 11 - Construction Contracts and IAS 18 - Revenues). Additionally, they have also superseded various other guidelines related to revenue recognition, such as (IFRIC 13 - Customer Loyalty Programs, IFRIC 15 - Agreements for the Construction of Real Estates, IFRIC 18 - Transfers of Assets from Customers, and SIC 31 - Revenue - Barter Transactions Involving Advertising Services).
Companies that have a large customer base and deal with a wide range of contract terms will need to carefully assess the implications of IFRS 15 on their financial statements. Failure to address the requirements of the standard could result in significant challenges in revenue recognition and financial reporting. Therefore, it is essential for such businesses to implement strategies to adapt to the changes brought about by IFRS 15.
Key points that you should be familiar with:
- The new standard will supersede the current revenue recognition guidelines set forth by the International Financial Reporting Standards.
- This change could lead to a significant impact on when and how revenue is recognized.
- The updated standard will necessitate a greater level of detailed disclosures, both qualitatively and quantitatively, regarding revenue recognition practices.
- The provision of incentives to purchase (e.g. free goods or services provided as part of a sale) may require separation
- Revenue generated from packaged goods and services necessitates a clear distinction and could lead to the postponement or hastening of revenue.
- Revisions to long term contracts are probable to occur over the term of the contract.
- Clear guidance regarding the treatment of licenses can have an impact on when revenue is recognized.
- The guidance on contract costs is expected to result in the recognition of more assets
- The availability of consistent historical financial records, along with a comprehensive quantification of the impact of IFRS 15, enables stakeholders to make informed decisions and assess the financial health and performance of the company accurately.
- Adoption method can be chosen between full retrospective or modified retrospective approach.
- Selecting the appropriate system for future use is a crucial decision, as the process of system implementation can span over several years to ensure its effectiveness and efficiency.
- Be aware of the updates and adjustments in the IFRS framework, specifically in relation to IFRS 9 (financial instruments) in 2018 and IFRS 16 (leases) in 2019