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IFRS 15 Made Easy

Richard Clarke

IFRS 15: Revenue from Contracts with Customers – A simple to understand Guide

Overview

IFRS 15 provides a single, principles-based five-step model to recognise revenue from contracts with customers. It replaces IAS 18 and IAS 11. The core principle is to recognise revenue when control of goods or services transfers to the customer.

Core Principle

"An entity shall recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled."

The Five-Step Model

1. Identify the Contract

A contract is an agreement that creates enforceable rights and obligations. It must:

  • Be approved by both parties
  • Have identifiable rights and payment terms
  • Have commercial substance
  • Result in probable collection of consideration

Example: A customer signs a contract to buy a laptop for £1,200, payable on delivery. This qualifies as a contract.

2. Identify the Performance Obligations

A performance obligation is a promise to transfer a good or service.

A good/service is distinct if:

  1. The customer can benefit from it independently.
  2. It is separately identifiable in the contract.

Example: A software package with 1-year support = 2 performance obligations:

  • Software
  • Support service

3. Determine the Transaction Price

The transaction price is the amount expected in exchange for goods/services.

Consider:

  • Variable consideration (discounts, bonuses)
  • Time value of money
  • Non-cash consideration
  • Consideration payable to the customer

Variable Consideration Methods:

  • Expected Value = probability-weighted outcome
  • Most Likely Amount = single most likely result

Example: Bonus of £1,000 for early delivery (80% likely)
Expected value = £1,000 × 80% = £800

4. Allocate the Transaction Price

When multiple obligations exist, allocate price based on stand-alone selling prices.

Example:

  • Phone: £400
  • Plan: £240
    Total = £640
    Bundle price = £600

Allocation:

  • Phone: £600 × (400/640) = £375
  • Plan: £600 × (240/640) = £225

5. Recognise Revenue When (or As) Obligations Are Satisfied

Revenue is recognised:

  • Over time (e.g. services, construction), or
  • At a point in time (e.g. sale of product)

Recognise over time if:

  • Customer simultaneously receives benefits
  • Asset created is controlled by customer
  • Asset has no alternative use and payment is enforceable

Otherwise → Point in time

Numerical Example

Contract Includes:

  • Machine (£10,000)
  • Installation (£2,000)
  • Maintenance for 1 year (£1,000)

Total Contract Price = £12,000
All components are distinct performance obligations.

Allocation:

Item Stand-Alone Price % of Total Allocated Price
Machine £10,000 71.4% £8,571
Installation £2,000 14.3% £1,714
Maintenance £1,000 7.1% £715

Recognition:

  • Machine: At point of delivery → £8,571
  • Installation: Over time as performed → £1,714
  • Maintenance: Straight-line over 12 months → £59.58/month

Contract Modifications

If a contract changes:

  • Separate contract → if added goods/services are distinct and priced fairly
  • Modify existing → adjust revenue recognition

Example: Customer adds extra maintenance at market rate → treated as a new contract.

Financial Statement Presentation

  • Contract Asset: Revenue recognised > billings
  • Contract Liability: Billings > revenue recognised

Required disclosures:

  • Disaggregated revenue
  • Balances of contract assets/liabilities
  • Details of performance obligations

Summary Table

Step Action
1 Identify the contract
2 Identify performance obligations
3 Determine the transaction price
4 Allocate price to obligations
5 Recognise revenue over time or at a point