IFRS 15: Revenue from Contracts with Customers By: CA Kamal Garg [B. Com (H), FCA, DISA (ICAI)] Member, Ind AS (IFRS) Implementation Committee of ICAI

Introduction Released on May 28, 2014; Replaced the two fundamental accounting Standards on revenue under prevailing IFRS, viz., IAS 18 - Revenue and IAS 11 - Construction Contracts; The core principle of the new Standard is that companies need to recognize revenue: to depict the transfer of goods and services to customers; in amounts that reflect the payment consideration; to which the company expects to be entitled to; in exchange for those goods or services IFRS 15 requires a five-step process to be applied to revenue arrangements for revenue recognition in Income Statement; IFRS 15 would be effective for the periods beginning on or after January 1, 2017 early adoption permitted

IFRSs being replaced - A snapshot

Five step process to recognize revenue

Step 1 - Identify the contract(s) with the customer A contract is an agreement between two or more parties that creates enforceable rights and obligations; An entity is required to apply the requirements to each contract that meets the following criteria: approval and commitment of the parties, identification of the rights of the parties, identification of the payment terms, the contract has commercial substance, and it is probable that the entity will collect the consideration to which it will be entitled to in exchange for the goods or services that will be transferred to the customers

Step 2 – Identify the performance obligations in the contract Performance obligations are promises in a customer's contract to transfer to the customer goods or services that are distinct; In determining whether good's or services are distinct, a company considers if the customer can benefit from the goods or services on its own or together with other resources that are readily available to the customer. A company also needs to consider whether the company's promise to transfer the goods or services is separately identifiable from other promises in the contract

Step 3 - Determine the transaction price In order to determine the transaction price, an entity should consider the effects of the following: variable consideration, constraining estimates of variable consideration, the existence of a significant financing component, non-cash consideration, and consideration payable to the customer

Step 4 - Allocate the transaction price An entity would typically allocate the transaction price to each performance obligation on the basis of the relative stand-alone selling prices of each distinct good or service. If a stand-alone selling price is not observable, the entity will be required to estimate the same. In certain situations the transaction price may include a discount or a variable amount of consideration that relates entirely to a specific part of the contract.

Step 5 - Recognize revenue when a performance obligation is satisfied IFRS 15 requires an entity to recognize revenue: when or as it satisfies a performance obligation by transferring a promised goods or service to a customer; which is the point in time when the customer obtains control of that goods or service; A performance obligation may be satisfied: at a point in time which is typically for promise to transfer goods to a customer; or over time which is typically for promise to transfer services to a customer. For a performance obligation in a customer's contract satisfied over time, an entity needs to select an appropriate measure of progress in order to determine how much revenue should be recognized as the performance obligation is satisfied

Step 5 - Recognize revenue when a performance obligation is satisfied An entity transfers control of a goods or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time, if one of the following criteria is met: the customer simultaneously receives and consumes the benefits provided by the entity's performance as the entity performs, the entity's performance creates or enhances an asset (for example, work-in-process) that the customer controls as the asset is created or enhanced, or the entity's performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.

Step 5 - Recognize revenue when a performance obligation is satisfied If a performance obligation is not satisfied over time, an entity satisfies the performance obligation at a point in time; To determine the point in time at which a customer obtains control of a promised asset and an entity satisfies a performance obligation, the entity would consider indicators of the transfer of control, which include, but are not limited to, the following: the entity has a present right to payment for the asset, the customer has legal title to the asset, the entity has transferred physical possession of the asset, the customer has the significant risks and rewards of ownership of the asset, and the customer has accepted the asset

Other requirements of IFRS 15 Portfolio of contracts - Although IFRS 15 specifies the accounting required for an individual contract, yet in some cases, a company may be able to apply the requirements of IFRS 15 to a portfolio of contracts instead of applying the requirements separately to each contract with a customer. Contract Costs - IFRS 15 includes requirements for accounting for some costs that are related to a contract with a customer. For costs to fulfil a contract that are not within the scope of other IFRS standards, a company would recognize an asset for those costs if the following criteria are met, viz., the costs relate directly to a contract or a specific anticipated contract, the costs generate or enhance resources of the company that will be used in satisfying performance obligations in the future, and the costs are expected to be recovered. Disclosure requirements of IFRS 15 - IFRS 15 aims to assist investors in better understanding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. The standard requires a company to disclose quantitative and/or qualitative information