IFRS 15
Active
Revenue from Contracts with Customers
Establishes a single five-step model for recognising revenue from contracts with customers.
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Conceptual Framework Linkage
Why revenue is recognised as CONTROL transfers
The Conceptual Framework recognises income when an entity's assets increase or liabilities decrease, resulting in an increase in equity (other than from owner contributions). IFRS 15 operationalises this for revenue specifically: revenue is recognised as the entity SATISFIES a performance obligation by TRANSFERRING CONTROL of a good or service to the customer – replacing the old "risks and rewards" test with a single, principles-based CONTROL-based model.
HOW IFRS 15 MAPS TO THE FRAMEWORK
Faithful representation – revenue reflects the CONSIDERATION the entity expects to be ENTITLED TO in exchange for goods/services, not merely cash received Comparability – a SINGLE five-step model replaced numerous industry- and transaction-specific revenue standards (IAS 18, IAS 11, and various interpretations), improving consistency across industries Relevance – recognising variable consideration only to the extent HIGHLY PROBABLE of no significant reversal (the "constraint," Section 4) balances relevance against reliability
IFRS 15 was developed JOINTLY with the US FASB, replacing DOZENS of previously disparate revenue recognition standards and interpretations with one converged, principles-based model.
The five-step model, at a glance
1. Identify the contract → 2. Identify performance obligations → 3. Determine the transaction price → 4. Allocate the transaction price → 5. Recognise revenue as obligations are satisfied
Every revenue transaction, in every industry, is analysed through this SAME five-step sequence – a direct embodiment of the Framework's comparability objective.
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Scope & Applicability
What IFRS 15 covers
IFRS 15 applies to ALL contracts with customers, EXCEPT: lease contracts (IFRS 16); insurance contracts (IFRS 17); financial instruments (IFRS 9); and certain non-monetary exchanges between entities in the SAME line of business to facilitate sales to customers/potential customers.
A "customer" is a party that has CONTRACTED with an entity to obtain goods/services that are an OUTPUT of the entity's ordinary activities, in exchange for consideration – collaborative arrangements with a partner sharing risks/rewards (rather than purchasing an output) generally fall OUTSIDE IFRS 15's scope.
Key definitions you must know
Performance obligation
A promise in a contract to transfer to the customer a good/service (or bundle) that is DISTINCT.
Transaction price
The amount of consideration an entity expects to be ENTITLED TO in exchange for transferring promised goods/services, excluding amounts collected on behalf of third parties.
Stand-alone selling price
The price at which an entity would sell a promised good/service SEPARATELY to a customer – the basis for allocating the transaction price.
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Step 1 & 2 – Identify the Contract and Performance Obligations
The contract criteria, and the "distinct" test
A contract exists only if: the parties have APPROVED the contract; each party's rights regarding goods/services are IDENTIFIABLE; PAYMENT terms are identifiable; the contract has COMMERCIAL SUBSTANCE; and COLLECTION of consideration is PROBABLE. A good/service is DISTINCT if the customer can benefit from it either on its own or with other readily available resources, AND it is separately identifiable from other promises in the contract.
Example 1: Identifying distinct performance obligations
A software company sells a perpetual software licence bundled with 2 years of technical support and unspecified future updates. The licence is fully functional on its own; the support and updates are routinely sold separately by the vendor and other providers.
This contract likely contains THREE distinct performance obligations: (1) the software licence, (2) technical support, and (3) unspecified future updates – each is capable of being distinct AND separately identifiable, since the customer can benefit from each on its own or with readily available resources, and they are not highly interdependent or integrated.
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Step 3 – Determine the Transaction Price
Variable consideration and the constraint
Variable consideration (discounts, rebates, refunds, credits, performance bonuses/penalties) is estimated using EITHER the EXPECTED VALUE method (probability-weighted) or the MOST LIKELY AMOUNT method (whichever better predicts the entitled consideration) – but INCLUDED in the transaction price ONLY to the extent HIGHLY PROBABLE that a SIGNIFICANT REVERSAL will NOT occur when the uncertainty resolves (the "constraint").
Example 2: Applying the variable consideration constraint
A construction company enters a contract with a $10,000,000 base price plus a $2,000,000 bonus if completed 30 days early. Based on historical performance on similar projects, management estimates an 80% probability of achieving the bonus, but the project has genuine, significant uncertainty (weather-dependent activities not yet begun).
Even though the EXPECTED VALUE would suggest including 2,000,000 × 80% = $1,600,000, the constraint requires the entity to assess whether it is HIGHLY PROBABLE no SIGNIFICANT reversal will occur – given the genuine remaining uncertainty, the entity may conclude ONLY the $10,000,000 base price should be included at this early stage, with the bonus recognised LATER as uncertainty resolves.
The constraint is a DELIBERATE reliability safeguard – without it, entities could recognise highly speculative variable consideration prematurely, overstating revenue before genuine certainty exists.
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Step 4 – Allocate the Transaction Price
Relative stand-alone selling price basis
The transaction price is allocated to EACH performance obligation in proportion to its RELATIVE STAND-ALONE SELLING PRICE – estimated (if not directly observable) using an adjusted market assessment, expected cost plus margin, or residual approach.
Example 3: Allocating a bundled transaction price
Continuing Example 1: total contract price is $12,000. Stand-alone selling prices: licence $9,000, support $2,000, updates $1,500 (total stand-alone: $12,500).
Licence = 12,000 × (9,000/12,500) = $8,640
Support = 12,000 × (2,000/12,500) = $1,920
Updates = 12,000 × (1,500/12,500) = $1,440
Total allocated = $12,000 (the overall $500 bundle discount is spread PROPORTIONATELY across all three obligations).
Support = 12,000 × (2,000/12,500) = $1,920
Updates = 12,000 × (1,500/12,500) = $1,440
Total allocated = $12,000 (the overall $500 bundle discount is spread PROPORTIONATELY across all three obligations).
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Step 5 – Recognise Revenue
Point in time vs over time
Revenue is recognised OVER TIME if ONE of: the customer simultaneously receives/consumes benefits as the entity performs; the entity's performance creates/enhances an asset the customer CONTROLS as it is created; or the asset has NO ALTERNATIVE USE to the entity AND the entity has an ENFORCEABLE RIGHT to payment for performance completed to date. Otherwise, revenue is recognised at a POINT IN TIME – when control transfers.
Example 4: Over-time recognition using percentage of completion
A construction company builds a custom factory (no alternative use, enforceable right to payment for work done) with a total contract price of $12,000,000 and estimated total costs of $9,000,000. At year end, costs incurred to date are $3,600,000.
Percentage complete = 3,600,000 / 9,000,000 = 40%
Revenue recognised = 12,000,000 × 40% = $4,800,000, recognised OVER TIME, based on progress toward completion (an input method, using costs incurred).
Revenue recognised = 12,000,000 × 40% = $4,800,000, recognised OVER TIME, based on progress toward completion (an input method, using costs incurred).
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Contract Costs
Capitalising incremental costs to obtain and fulfil contracts
INCREMENTAL costs of OBTAINING a contract (e.g. sales commissions) are capitalised as an asset IF the entity expects to RECOVER them – with a practical expedient to expense them immediately if the amortisation period would be ONE YEAR or less. Costs to FULFIL a contract not covered by another Standard are capitalised if they relate DIRECTLY to a contract, generate/enhance resources used to satisfy future performance obligations, and are expected to be RECOVERED.
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Principal vs Agent
Gross vs net revenue presentation
An entity determines whether it is a PRINCIPAL (controls the good/service BEFORE transfer to the customer – recognises revenue GROSS) or an AGENT (arranges for another party to provide the good/service – recognises revenue NET, being its commission/fee only) – this assessment focuses on whether the entity CONTROLS the specified good/service before it is transferred.
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Disclosure Requirements
Required disclosures
DISAGGREGATION & CONTRACT BALANCES
Revenue recognised, disaggregated into categories depicting how economic factors affect the nature/amount/timing/uncertainty of revenue and cash flows Opening/closing balances of contract assets, contract liabilities, and receivables from contracts with customers
PERFORMANCE OBLIGATIONS & JUDGEMENTS
Information about remaining performance obligations, including the aggregate transaction price allocated to them and when revenue is expected to be recognised Significant judgements affecting the amount/timing of revenue recognition (e.g. determining timing of satisfaction, transaction price, allocation)
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Critical Judgments & Estimates
Where management judgement matters most
SIGNIFICANT JUDGEMENTS
Identifying distinct performance obligations within a bundled contract Determining whether revenue is recognised over time or at a point in time Principal vs agent classification
SIGNIFICANT ESTIMATES
Variable consideration estimates, and application of the constraint Stand-alone selling prices where not directly observable Percentage of completion measures for over-time recognition
IFRS 15 is one of the MOST judgement-intensive standards for many industries (software, construction, telecoms) given the sheer variety of contract structures it must accommodate through a single principles-based model.
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IFRS vs US GAAP
Comparison – IFRS 15 vs US GAAP (ASC 606)
FeatureIFRS (IFRS 15)US GAAP
Five-step modelIdentical structureSAME five-step model – IFRS 15 and ASC 606 were developed JOINTLY and are nearly IDENTICAL
Collectability threshold"Probable" (per IFRS's own definition, generally >50%)Also "probable," but US GAAP's definition of "probable" is a HIGHER threshold (~75-80%) than IFRS's – a subtle but real difference
Licence revenue guidanceBroadly principles-basedSlightly MORE detailed/prescriptive application guidance for licences of intellectual property
IFRS 15 and ASC 606 are the RESULT of a genuinely joint IASB/FASB project – among the most converged standards, with only a handful of narrow application differences remaining.
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Statement Mapping
Comprehensive event-to-statement mapping table
Event / transactionStatement(s) affectedNotes
Revenue recognised as performance obligations satisfiedSOPLPoint in time or over time, per Step 5
Contract asset recognised (performance ahead of billing)SOFPRights to consideration conditional on something other than time
Contract liability recognised (billing ahead of performance)SOFPDeferred revenue
Incremental costs to obtain a contract capitalisedSOFPAmortised consistent with the transfer of goods/services
Refund liability for variable considerationSOFPEstimated amount NOT expected to be retained
Cash received from customersCash Flow StatementOperating activities inflow
Disaggregation, remaining obligations, judgementsNotesMandatory disclosure
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Related Standards
Cross-reference map
StandardConnection
IFRS 9Governs financing components within contracts and receivable impairment
IFRS 16Leases are explicitly EXCLUDED from IFRS 15's scope
IAS 2Governs inventory costs where goods are held pending transfer of control to a customer
IAS 37Governs onerous contract provisions where a contract's costs exceed expected benefits
Quick-reference glossary
Contract asset
An entity's right to consideration in exchange for goods/services transferred, conditional on something other than the passage of time.
The constraint
The requirement to include variable consideration only to the extent highly probable a significant reversal will not occur.
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Quick-Reference Glossary
Performance obligation
A promise in a contract to transfer to the customer a good/service (or bundle) that is DISTINCT.
Transaction price
The amount of consideration an entity expects to be ENTITLED TO in exchange for transferring promised goods/services, excluding amounts collected on behalf of third parties.
Stand-alone selling price
The price at which an entity would sell a promised good/service SEPARATELY to a customer – the basis for allocating the transaction price.
Contract asset
An entity's right to consideration in exchange for goods/services transferred, conditional on something other than the passage of time.
Contract liability
An entity's obligation to transfer goods/services to a customer for which it has received consideration (or an amount of consideration is due) – deferred revenue.
The constraint
The requirement to include variable consideration only to the extent highly probable a significant reversal will not occur.
Financial statement key
BS Balance sheet
IS Income statement
SE Statement of changes in equity
OCI Other comprehensive income
SCF Statement of cash flows
History & Development
Apr-2001
In April 2001 the International Accounting Standards Board (Board) adopted IAS 11 Construction Contracts and IAS 18 Revenue, both of which had originally been issued by the International Accounting Standards Committee (IASC) in December 1993.
Dec-1982
IAS 18 replaced a previous version: Revenue Recognition (issued in December 1982).
Mar-1979
IAS 11 replaced parts of IAS 11 Accounting for Construction Contracts (issued in March 1979).
Dec-2001
In December 2001 the Board issued SIC-31 Revenue-Barter Transactions Involving Advertising Services. The Interpretation was originally developed by the Standards Interpretations Committee of the IASC to determine the circumstances in which a seller of advertising services can reliably measure revenue at the fair value of advertising services provided in a barter transaction.
Jun-2007
In June 2007 the Board issued IFRIC 13 Customer Loyalty Programmes. The Interpretation was developed by the IFRS Interpretations Committee (the ‘Interpretations Committee’) to address the accounting by the entity that grants award credits to its customers.
Jul-2008
In July 2008 the Board issued IFRIC 15 Agreements for the Construction of Real Estate. The Interpretation was developed by the Interpretations Committee to apply to the accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors.
Jan-2009
In January 2009 the Board issued IFRIC 18 Transfers of Assets from Customers. The Interpretation was developed by the Interpretations Committee to apply to the accounting for transfers of items of property, plant and equipment by entities that receive such transfers from their customers.
May-2014
In May 2014 the Board issued IFRS 15 Revenue from Contracts with Customers, together with the introduction of Topic 606 into the Financial Accounting Standards Board’s Accounting Standards Codification®. IFRS 15 replaces IAS 11, IAS 18, IFRIC 13, IFRIC 15, IFRIC 18 and SIC-31. IFRS 15 provides a comprehensive framework for recognising revenue from contracts with customers.
Sep-2015
In September 2015 the Board issued Effective Date of IFRS 15 which deferred the mandatory effective date of IFRS 15 to 1 January 2018.
Apr-2016
In April 2016 the Board issued Clarifications to IFRS 15 Revenue from Contracts with Customers clarifying the Board’s intentions when developing some of the requirements in IFRS 15. These amendments do not change the underlying principles of IFRS 15 but clarify how those principles should be applied and provide additional transitional relief.
May-2017
In May 2017, the Board issued IFRS 17 Insurance Contracts which permits an entity to choose whether to apply IFRS 17 or IFRS 15 to specified fixed-fee service contracts that meet the definition of an insurance contract.
Jan-2016
IFRS 16 Leases
Minor consequential amendment to IFRS 15
Mar-2018
Amendments to References to the Conceptual Framework in IFRS Standards and IFRS 18 Presentation and Disclosure in Financial Statements
Minor consequential amendment to IFRS 15