IFRS 15 was issued by the International
Accounting Standards Board (the IASB) to provide a single global
standard prescribing how a reporting entity would recognize revenue
from a contract with a customer.
Although the IASB and the Financial Accounting Standards Board
(FASB) held meetings to determine how IFRS 15 would be implemented,
consensus was not attained and both the FASB and the IASB agreed to
defer the effective date of the new standard to annual periods
commencing on or after January 1, 2018, with early adoption
To understand why a consensus was not reached, we need to look
at what IFRS 15 was proposing.
The Five Step Model Framework:
IFRS 15 proposed a five-step framework to recognize revenue.
Step 1: Identify the contract with the
A contract is an agreement between two or more parties that creates
enforceable rights and obligations. Contracts may be combined and
accounted for as a single contract if they were entered into at or
near the same time with the same customer and they comply with
Step 2: Identify the performance obligations in the
At the inception of a contract, the entity should assess the goods
or services that have been promised to the customer and identify
the performance obligations in the contract. For some contracts,
there may be multiple performance obligations and the entity needs
to determine what method or methods could be used to measure
satisfaction of the performance obligations.
Step 3: Determine the transaction price
The transaction price is the consideration to which an entity
expects to be entitled in exchange for transferring promised goods
or services to a customer, excluding amounts collected on behalf of
third parties. In determining the transaction price, an entity
should consider past customary business practices and whether there
is non-cash consideration or elements of variable consideration
that arises (if the consideration is contingent on the
occurrence of a future event or as a result of discounts, rebates,
refunds, credits, price concessions, incentives, performance
bonuses, penalties or other similar items).
Step 4: Allocate the transaction price to the
performance obligations in the contract
If there are multiple performance obligations in a contract, an
entity needs to allocate the transaction price to each performance
obligation by referencing the relative standalone selling price of
the performance obligation.
Step 5: Recognize revenue when (or as) the entity
satisfies a performance obligation
Revenue is recognised as control is passed, either over time or at
a point in time. Revenue would be recognised over time if certain
criteria are met; otherwise, revenue would be recognised when
control is passed at a specified point in time.
To assist with the implementation of this standard, the IASB and
FASB have formed a Joint Transition Group for Revenue Recognition
to solicit, analyze, and discuss stakeholder issues arising from
the implementation of IFRS 15 and its US counterpart, ASU Topic
606. The purpose of this is to inform the IASB and FASB about
implementation issues, which will help the boards determine what,
if any, action will be needed to address those issues. This process
has resulted in some issues being forwarded to the boards for their
consideration. The IASB has completed its exposure draft process
proposing certain clarifications and is drafting changes to IFRS
15. The clarifications are expected to deal with performance
obligations, principal versus agent, and licencing.
On first read, IFRS15 may not seem too controversial but a
closer read of the standard raises questions on how the steps would
be applied in practice. Specifically, companies that are required
to follow IFRS need to comply with the recommendations set out in
IFRS 15 and document how they have complied with the standard.
Auditors of the financial statements of those companies need to
assess whether the companies have recognized revenue in compliance
with the standard.
Another complicating factor is the difference between U.S. GAAP
and IASB standards. U.S. GAAP tends to provide detailed guidance on
the application of standards while IFRS tends to provide underlying
principles, then leave it up to companies and their auditors to
apply professional judgement in deciding how the standards should
Stay tuned as the boards continue to grapple with this complex
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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