IFRS AT A GLANCE

IFRS 15 Revenue from Contracts

with Customers
 Effective Date
Page 1 of 8
Periods beginning on or after 1 January 2018

IFRS 15 Revenue from Contracts with Customers

SCOPE DEFINITIONS

Applies to all contracts with customers, except: Contract: Revenue: Distinct: Performance obligation:
 Lease contracts (refer to IFRS 16) An agreement between two or Income arising in the course of an entity’s Refer to Step 2 below. A promise to transfer to the customer either:
 Insurance contracts (refer to IFRS 4 / IFRS 17) more parties that creates ordinary activities. (i) A distinct (bundle of) good(s) or
enforceable rights and obligations. service(s)
 Financial instruments and other contractual
rights or obligations (refer to IFRS 9/IAS 39, Customer: Income: Stand-alone selling price: (ii) A series of substantially the same
IFRS 10, IFRS 11, IAS 27, and IAS 28) A party that has contracted with Increases in economic benefits in the form The price at which a distinct goods or services that have the
 Certain non-monetary exchanges. an entity to obtain goods or of inflows or enhancements of assets or promised good or service same pattern of transfer to the customer,
services that are an output of the decreases of liabilities that result in an would be sold separately and the pattern of transfer is both over
entity’s ordinary activities in increase in equity (other than those from to a customer. time and represents the progress towards
exchange for consideration. equity participants). complete satisfaction of the performance
obligation.

THE ‘FIVE STEP’ MODEL

Revenue from contracts with customers is recognised based on the application of a principle-based ‘five step’ model:

Step 1 and 2 Step 3 Step 4 Step 5

Identify… Determine… Allocate… Recognise…

…revenue when each

…the performance …the transaction price to
…the contract …the transaction price performance obligation is
obligation(s) each performance obligation
satisfied
 Effective Date
Page 2 of 8
Periods beginning on or after 1 January 2018

IFRS 15 Revenue from Contracts with Customers

STEP 1 – IDENTIFY THE CONTRACT

Features of a ‘contract’ under IFRS 15 Contract modifications

Contracts, and approval of contracts, can be written, oral or implied by an entity’s customary business A change in enforceable rights and obligations (i.e. scope and/or price) is only accounted for as a
practices. contract modification if it has been approved, and creates new or changes existing enforceable rights
IFRS 15 requires contracts to have all of the following attributes: and obligations.

 The contract has been approved Contract modifications are accounted for as a separate contract if, and only if:
 The rights and payment terms regarding goods and services to be transferred can be identified  The contract scope changes due to the addition of distinct goods or services, and
 The contract has commercial substance  The change in contract price reflects the standalone selling price of the distinct good or service.
 It is probable that the consideration will be received (considering only the customer’s ability and
Contract modifications that are not accounted for as a separate contract are accounted for as either:
intention to pay).
(i) Replacement of the original contract with a new contract (if the remaining goods or services under
If each party to the contract has a unilateral enforceable right to terminate a wholly unperformed
the original contract are distinct from those already transferred to the customer)
contract without compensating the other party (or parties), no contract exists under IFRS 15.
(ii) Continuation of the original contract (if the remaining goods or services under the original contract
Combining multiple contracts are not distinct from those already transferred to the customer, and the performance obligation is
Contracts are combined if they are entered into at (or near) the same time, with the same customer, if partially satisfied at modification date).
either: (iii) Mixture of (i) and (ii) (if elements of both exist).
 The contracts are negotiated as a package with a single commercial objective
 The consideration for each contract is interdependent on the other, or
 The overall goods or services of the contracts represent a single performance obligation.
 Effective Date
Page 3 of 8
Periods beginning on or after 1 January 2018

IFRS 15 Revenue from Contracts with Customers

STEP 2 – IDENTIFY THE PERFORMANCE OBLIGATIONS

Performance obligations are the DEFINITION OF ‘DISTINCT’ (TWO CRITERIA TO BE MET)

contractual promise by an entity, to
transfer to a customer, distinct goods or (i) The customer can ‘benefit’ from the good or service (ii) The promise to transfer a good or service is separable from other promises in
services, either individually, in a bundle, Benefit from the good or service can be through either: the contract
or as a series over time (Refer to the  Use, consumption, or sale (but not as scrap) The assessment requires judgement, and consideration of all relevant facts and
‘Definitions’ section above).  Held in a way to generate economic benefits. circumstances.
Activities of the entity that do not result Benefit from the good or service can be either: A good or service may not be separable from other promised goods or services in the
in a transfer of goods or services to the contract, if:
 On its own
customer (e.g. certain internal There are significant integration services with other promised goods or services
 Together with other readily available resources (i.e. those which can be 
administrative ‘set-up activities’) are not It modifies/customises other promised goods or services
acquired by the customer from the entity or other parties). 
performance obligations of the contract  It is highly dependent/interrelated with other promised goods or services.
with the customer and do not give rise to
revenue.
 Effective Date
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Periods beginning on or after 1 January 2018

IFRS 15 Revenue from Contracts with Customers

STEP 3 – DETERMINE THE TRANSACTION PRICE

The transaction price is the amount of consideration an entity expects to be entitled to in exchange for transferring the promised goods or services (not amounts collected on behalf of third parties, e.g. sales taxes or value added taxes).
The transaction price may be affected by the nature, timing, and amount of consideration, and includes consideration of signi ficant financing components, variable components, amounts payable to the customer (e.g. refunds and rebates), and
non-cash amounts.

Accounting for a significant financing component Accounting for variable consideration

If the timing of payments specified in the contract provides either the customer or the entity with a significant benefit E.g. Discounts, rebates, refunds, credits, concessions, incentives, performance bonuses, penalties, and contingent
of financing the transfer of goods or services. payments.
The transaction price is adjusted to reflect the cash selling price at the point in time control of the goods or services is Variable consideration must be estimated using either:
transferred.
(i) Expected value method: based on probability weighted amounts within a range (i.e. for large number of similar
A significant financing component can either be explicit or implicit. contracts)
Factors to consider include: (ii) Single most likely amount: the amount within a range that is most likely to arise.
 Difference between the consideration and cash selling price Constraining (limiting) the estimates of variable consideration
 Combined effect of interest rates in the relevant market and length of time between transfer of control of the goods
or services and payment.  Variable consideration is only recognised if it is highly probable that a subsequent change in its estimate would not
result in a significant revenue reversal (i.e. a significant reduction in cumulative revenue recognised).
A significant financing component does not exist when
 The customer paid in advance and timing of the transfer of control of the goods or services is at the customer’s Accounting for consideration payable to the customer
discretion Includes cash paid (or expected to be paid) to the customer (or the customer’s customers) as well as credits or other
 The consideration is variable with the amount or timing based on factors outside of the control of the parties items such as coupons and vouchers.
 The difference between the consideration and cash selling price arises for other non-financing reasons (i.e.
performance protection). Accounted for as a reduction in the transaction price, unless payment is in exchange for a good or service received from
the customer in which case no adjustment is made – except where:
Discount rate to be used
 The consideration paid exceeds the fair value of the goods or services received (the difference is set against the
 Must reflect credit characteristics of the party receiving the financing and any collateral/security provided.
transaction price)
Practical expedient – period between transfer and payment is 12 months or less  The fair value of the goods or services cannot be reliably determined (full amount taken against the transaction
 Do not account for any significant financing component. price).

Accounting for non-cash consideration

Is accounted for at fair value (if not reliably determinable, it is measured indirectly by reference to stand-alone selling
price of the goods or services).
 Effective Date
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Periods beginning on or after 1 January 2018

IFRS 15 Revenue from Contracts with Customers

STEP 4 – ALLOCATE THE TRANSACTION PRICE TO EACH PERFORMANCE OBLIGATION

The transaction price (determined in Step 3) is Allocating a ‘discount’

allocated to each performance obligation A discount exists where the sum of the stand-alone selling price of each performance obligation exceeds the consideration payable.
(determined in Step 2) based on the stand-alone
selling price of each performance obligation. Discounts are allocated on a proportionate basis, unless there is observable evidence that the discount relates to one or more specific performance
obligation(s) after meeting all of the following criteria:
If the stand-alone selling price(s) are not
observable, they are estimated. Approaches to  The goods or services (or bundle thereof) in the performance obligation are regularly sold on a stand-alone basis, and at a discount
estimate may include:  The discount is substantially the same in amount to the discount that would be given on a stand-alone basis.

(i) Adjusted market assessment approach

Allocating variable consideration
(ii) Expected cost plus a margin approach
(iii) Residual approach (i.e. residual after Variable consideration is allocated entirely to a performance obligation (or a distinct good or service within a performance obligation), if both:
observable stand-alone selling prices of other  The terms of the variable consideration relate specifically to satisfying the performance obligation (or transferring the distinct good or service within
performance obligations have been deducted). the performance obligation)
 The allocation of the variable consideration is consistent with the principle that the transaction price is allocated based on what the entity expects to
Note that restrictive criteria must be met for receive for satisfying the performance obligation (or transferring the distinct good or service within the performance obligation).
approach (iii) to be applied.
 Effective Date
Page 6 of 8
Periods beginning on or after 1 January 2018

IFRS 15 Revenue from Contracts with Customers

STEP 5 – RECOGNISE REVENUE AS EACH PERFORMANCE OBLIGATION IS SATISFIED

The transaction price allocated to each (i) RECOGNISING REVENUE OVER TIME (APPLIES IF ANY OF THE FOLLOWING THREE CRITERIA ARE MET)
performance obligation (determined in Step 4) is
recognised as/when the performance obligation is (a) Customer simultaneously receives and (c) The entity’s performance does not create an asset with an alternative use to the entity, and
satisfied, either consumes all of the benefits the entity has an enforceable right to payment for performance completed to date.

(i) Over time, or e.g. many recurring service contracts (such as (i) Alternate use (ii) Enforceable right to payment
cleaning services). Assessment requires judgment and consideration of all Consider both the specific contractual
(ii) At a point in time.
If another entity would not need to facts and circumstances. terms and any applicable laws or
Satisfaction occurs when control of the promised substantially re-perform the work already regulations. Ultimately, other than due
good or service is transferred to the customer: An asset does not have an alternate use if the entity
performed by the entity in order to satisfy the cannot practically or contractually redirect the asset to to its own failure to perform as
 Ability to direct the use of the asset performance obligation, the customer is another customer, such as: promised, an entity must be entitled to
 Ability to obtain substantially all the remaining considered to be simultaneously receiving and compensation that approximates the
benefits from the asset. consuming benefits.  Significant economic loss, i.e. through rework, or selling price of the goods or services
Factors to consider when assessing transfer of reduced sale price (practical) transferred to date.
(b) The entity’s work creates or enhances an  Enforceable rights held by the customer to prohibit
control:
asset controlled by the customer redirection of the asset (contractual). The profit margin does not need to
 Entity has present right to payment for the asset Whether or not the asset is largely interchangeable with equal the profit margin expected if the
 Entity has physically transferred the asset The asset being created or enhanced (e.g. a contract was fulfilled as promised. For
other assets produced by the entity should also be
 Legal title of the asset work in progress asset) could be tangible or example, it could be a proportion of the
considered in determining whether practical or contractual
 Risks and rewards of ownership intangible. expected profit margin that reflects
limitations occur.
 Acceptance of the asset by the customer. performance to date.

Revenue that is recognised over time is recognised in a way that depicts the entity’s performance in transferring control of goods or services to
customers. Methods include:
 Output methods: (e.g. Surveys of performance completed to date, appraisals of results achieved, milestones reached, units produced/delivered etc.)
 Input methods: (e.g. Resources consumed, labour hours, costs incurred, time lapsed, machine hours etc.), excluding costs that do not represent the
seller’s performance.

(ii) RECOGNISING REVENUE AT A POINT IN TIME

Revenue is recognised at a point in time if the criteria for recognising revenue over time are not met.
Revenue is recognised at the point in time at which the entity transfers control of the asset to the customer (see adjacent box).
 Effective Date
Page 7 of 8
Periods beginning on or after 1 January 2018

IFRS 15 Revenue from Contracts with Customers

APPLICATION GUIDANCE WITHIN IFRS 15

IFRS 15 contains application Contract costs Licensing (of an entity’s intellectual property (IP))
guidance for:
Only incremental costs of obtaining a contract that are incremental and expected to be recovered can (i) If the licence is not distinct from other goods or services
 Contract costs be recognised as an asset.  It is accounted for together with other promised goods or services as a single performance obligation
 Sale with a right of return A licence is not distinct if either:
If costs to fulfil a contract are within the scope of other IFRSs (e.g. IAS 2, IAS 16, IAS 38 etc.) apply 
 Warranties
those IFRSs. ‒ It is an integral component to the functionality of a tangible good, or
 Principal versus agent
‒ The customer can only benefit from the licence in conjunction with a related service.
considerations If not, a contract asset is recognised under IFRS 15 if, and only if, the costs: (ii) If the licence is distinct from other goods or services
 Customer options for
 Are specifically identifiable and directly relate to the contract (e.g. direct labour, materials, It is accounted for as a single performance obligation.
additional goods or services 
overhead allocations, explicitly on-charged costs, other unavoidable costs (e.g. sub-contractors)) Revenue from a distinct licence is recognised over time (refer Step 5) if, and only if:
 Customers’ unexercised rights 
 Create (or enhance) resources of the entity that will be used to satisfy performance obligation(s) in
 Non-refundable upfront fees
the future, and (a) The entity (is reasonably expected to) undertakes activities that will significantly affect the IP to
(and some related costs)
 Are expected to be recovered. which the customer has rights
 Licensing
(b) The customer’s rights to the IP expose it to the positive/negative effects of the activities that the
 Repurchase agreements Costs that are recognised as an expense as incurred
 Consignment arrangements
entity undertakes in (a).
 General and administrative expenses (c) No goods or services are transferred to customer as the entity undertakes the activities in (a).
 Bill-and-hold arrangements
 Wastage, scrap, and other (unanticipated) costs not incorporated into pricing the contract
 Customer acceptance.  Revenue from a distinct licence is recognised at a point in time (refer to Step 5) if the criteria for
 Costs related to (or can’t be distinguished from) past performance obligations.
A summary is set out on this recognition over time (above) are not met. The right is over the IP in its form and functionality at the
page for those items in bold Amortisation and impairment of contract assets point at which the licence is granted to the customer.
type above.  Amortisation is based on a systematic basis consistent with the pattern of transfer of the goods or ‒ Revenue is recognised at the point in time at which control of the licence is transferred to the
services to which the asset relates customer.
 Impairment exists where the contract carrying amount is greater than the remaining consideration
receivable, less directly related costs to be incurred.

Warranties (fall into either one of the two categories): Non-refundable upfront fees
(i) Assurance type (apply IAS 37): (ii) Service type (accounted for separately in accordance with Includes additional fees charged at (or near) the inception of the contract (e.g. joining fees, activation
IFRS 15): fees, set-up fees etc.).
 An assurance to the customer that the good or service will
function as specified  A service is provided in addition to an assurance to the customer Treatment dependents on whether the fee relates to the transfer of goods or services to the customer
 The customer cannot purchase this warranty separately from the that the good or service will function as specified (i.e. a performance obligation under the contract):
entity.  This applies regardless of whether the customer is able to  Yes: Recognise revenue in accordance with IFRS 15 (as or when goods or services transferred)
purchase this warranty separately from the entity.
 No: Treated as an advance payment for the performance obligations to be fulfilled.
In determining the classification (or part thereof) of a warranty, an entity considers:
(Note: Revenue recognition period may in some cases be longer than the contractual period if the
 Legal requirements: (warranties required by law are usually assurance type) customer
 Length: (longer the length of coverage, more likely additional services are being provided)
 Effective Date
Page 8 of 8
Periods beginning on or after 1 January 2018

IFRS 15 Revenue from Contracts with Customers

PRESENTATION TRANSITION (APPENDIX C) DISCLOSURE

Statement of financial position Retrospective application (either) Overall objective to disclose sufficient information to enable users to understand the nature, amount,
 Contract assets and contract liabilities from  For each prior period presented in accordance timing, and uncertainty of revenue and cash flows arising from an entity’s contracts with customers.
customers are presented separately with IAS 8 Accounting Policies, Changes in Contracts with customers (information Significant judgements:
 Unconditional rights to consideration are Accounting Estimates and Errors; or regarding):
presented separately as a receivable.  Cumulative effect taken to the opening  Performance obligation satisfaction
balance of retained earnings in the period of  Disaggregation of revenue  Transaction price (incl. allocation)
Statement of profit or loss and other Contract assets and contract liabilities Determining contract costs capitalised.
initial application.  
comprehensive income  Performance obligations (incl. remaining).
For full retrospective application, practical Contract costs capitalised:
 Line items (revenue and impairment) are Use of practical expedients (related to):
presented separately in accordance with the expedients (for)  Method of amortisation
requirements of IAS 1 Presentation of  Restatement of completed contracts  Significant financing component (12 month)  Closing balances by asset type
Financial Statements.  Determining variable consideration of  Contract costs (12 month amortisation).  Amortisation and impairment.
completed contracts
 Disclosures regarding the transaction price
allocation to performance obligations still to
be satisfied.
For both approaches there is a practical
expedient for contracts modified in earlier
periods.
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