IFRS 15

IFRS 15 is an International Financial Reporting Standard (IFRS) promulgated by the International Accounting Standards Board (IASB) providing guidance on accounting for revenue from contracts with customers.^[1] It was adopted in May 2014 and became effective in January 2018.^[2] The new standard replaces the previous standards IAS 11 and 18.^[3][4] It was the subject of a joint project with the Financial Accounting Standards Board (FASB), and the guidance is substantially converged between the two boards.^[5][6]

History

A main purpose of the project to develop IFRS 15 was that there were important differences between the IASB and FASB definitions of revenue.^[5][7] The IASB also believed that its previous guidance was not sufficiently detailed.^[5][8]

The IASB began working on its revenue project in 2002.^[9][10] The boards released their first discussion paper in 2008 and exposure drafts in 2010 and 2011.^[9][11] The final standard was issued on 28 May 2014.^[5]

Revenue model

The core principle of IFRS 15 is to recognize revenue to depict the transfer of promised goods or services to customers.^[12]

The IFRS 15 revenue model has five steps:^[9]

1. Identify the contract with a customer.^[13]
2. Identify all the individual performance obligations within the contract.^[14]
3. Determine the transaction price.^[15]
4. Allocate the price to the performance obligations.^[16]
5. Recognize revenue as the performance obligations are fulfilled.^[17]

Step 1: Identify the contract with a customer

According to IFRS 15, certain criteria must be met, including approval by both parties and identifying each party's rights and payment terms.^[18][19] The contract must also have “commercial substance” and collectability must be probable.^[18][20] Identifying the contract can be as simple as standard business practice, such as taking a product to a cashier.^[21]

Practical Example: Construction Catch-up (Example 8) A construction company building a commercial tower for CU1 million may experience a scope change, such as an altered floor plan that increases the price by CU150,000 and costs by CU120,000.^[22] If this building is treated as a single, integrated performance obligation, the entity does not start a new contract but instead recalculates its progress across the entire project.^[23] For instance, if a previously constrained CU200,000 bonus also becomes "highly probable" at the time of modification, the total transaction price jumps to CU1.35 million.^[24] Even if no new work was done that day, the entity must recognize an immediate "catch-up" in revenue (e.g., CU91,200) to ensure the cumulative revenue reflects the new 51.2% completion rate of the higher total price.^[25]

Example 8: Modification Catch-up Calculation (CU)

Item	Before Modification	After Modification
Fixed Consideration	1,000,000	1,150,000
Variable Bonus (Constrained vs. Probable)	0	200,000
Total Transaction Price	1,000,000	1,350,000
Total Expected Costs	700,000	820,000
Percentage of Completion (Costs Incurred: 420k)	60.0%	51.2%
Cumulative Revenue Recognition	600,000	691,200

Step 2: Identify all the individual performance obligations within the contract

A good or service qualifies as a performance obligation if it is “distinct.”^[26] An item is distinct if the customer can benefit from it on its own and the promise is separately identifiable from other transfers in the contract.^[27] Highly interdependent items may be combined into a single obligation.^[28]

Step 3: Determine the transaction price

The transaction price is the amount of consideration an entity expects to receive.^[29] For non-cash consideration, an entity applies fair value measurement.^[30]

• Variable consideration: Calculated using the most likely amount or the expected value approach.^[9][31] These estimates are subject to a "constraint" to prevent significant reversals.^[32]
• Significant financing component: The price is adjusted to eliminate the effect of the time value of money.^[18][33]

Practical Example: Construction Penalties and Bonuses (Examples 20–21) In many commercial contracts, the final price is not a fixed sum but varies based on performance, such as a construction company building a customized factory for a base price of CU2.5 million.^[34] If the contract includes a daily penalty for late completion or a bonus for finishing early, the entity must estimate this variable consideration using the "expected value" method—a probability-weighted average—if there are a range of possible outcomes.^[35] Conversely, for a discrete outcome like a single CU150,000 "quality bonus" that is either fully earned or not at all, the "most likely amount" method is used to better predict the entitled consideration.^[36] Even simple penalties are treated as variable; for instance, a CU1 million contract with a CU100,000 late fee is accounted for as a fixed CU900,000 base plus a CU100,000 variable component.^[37]

Crucially, the entity must apply a "constraint" to these estimates, only including variable amounts in the transaction price if it is "highly probable" that a significant revenue reversal will not occur when the uncertainty is later resolved.^[38] This ensures that companies do not recognize "hopeful" revenue that might have to be cancelled later.^[39]

IFRS 15 Estimation Methods for Variable Consideration

Method	Best Application	Example Logic
Expected Value	Large number of outcomes	Daily penalties/incentives (weighted average)
Most Likely Amount	Two possible outcomes	Performance bonuses (all-or-nothing)

Practical Example: Delayed Payment and Return Rights (Example 26) A company sells a new product for CU121, but the payment is due 24 months after delivery.^[40] Although the customer takes control immediately, the contract allows a 90-day right of return. Because the product is new and return rates are unpredictable, the "constraint" prevents any revenue recognition during the first three months.^[41] No interest is accrued during this standby period because no receivable has been recognized yet.^[42] Once the return right lapses, the entity recognizes revenue at the cash selling price of CU100, not the full CU121.^[43] The remaining CU21 is treated as interest income over the following 21 months, reflecting an implicit interest rate (e.g., 10%) for financing the customer's purchase.^[44]

Example 26: Recognition Timeline

Period	Accounting Action	Reasoning
Day 1–90	No Revenue Recognized	Right of return makes revenue "not highly probable."[45]
Day 91	CU100 Revenue Recognized	Return right lapsed; cash price is the fair value.[46]
Month 4–24	CU21 Interest Recognized	Represents the financing benefit provided to the customer.[47]

Step 4: Allocate the transaction price

The transaction price is allocated based on the relative stand-alone selling prices of the distinct goods or services.^[48] If prices are not observable, methods such as "expected cost plus a margin" are used.^[9][49]

Practical Example: Bundled Products and Discounts (Example 33) Companies often sell products in bundles, such as selling Products A, B, and C together for a total price of CU100, even though their individual values sum to CU150.^[50] Since the prices for B and C may not be directly observable, the entity must estimate them using techniques like the "adjusted market assessment" or "expected cost plus a margin" approach.^[51] Unless there is specific evidence that a discount belongs to only one part of the contract, the CU50 total discount is allocated proportionately across all items.^[52] In this case, Product A (valued at CU50) would only be allocated CU33 of the transaction price, ensuring that the revenue recognized for each item reflects its relative share of the total deal.^[53]

Example 33: Proportional Allocation of CU100 Transaction Price

Product	Stand-alone Price (CU)	Allocation Formula	Allocated Revenue (CU)
Product A	50	(50 / 150) × 100	33
Product B	25	(25 / 150) × 100	17
Product C	75	(75 / 150) × 100	50
Total	150		100

Practical Example: Targeted Discounts and Residual Pricing (Example 34) Consider an entity selling Products A (CU40), B (CU55), and C (CU45).^[54] If the entity regularly sells B and C together for CU60, but sells A strictly for CU40, any discount in a bundle of all three must be allocated entirely to B and C rather than A (Case A).^[55] Furthermore, if the contract includes a Product D with a "highly variable" price (ranging from CU15 to CU45), the entity may use the residual approach.^[56] Under this method, the entity first allocates the observable prices to A, B, and C, and assigns the remaining balance of the total transaction price to Product D.^[57] However, this is only permitted if the resulting price for D is reasonable; if the calculation produces an unrealistically low value (e.g., CU5), the residual approach is deemed inappropriate and a different estimation method must be used (Case C).^[58]

Example 34 Case B: Residual Allocation (CU)

Product	Stand-alone Price	Method	Allocated Revenue
Product A	40	Directly observable	40
Products B & C	60	Observable bundle price	60
Product D	30	Residual (130 – 100)	30
Total	130	(Transaction Price)	130

Step 5: Recognize revenue as the performance obligations fulfilled

An entity recognizes revenue when it satisfies a performance obligation by transferring control to the customer.^[59][60]

• Over time: Recognized if the customer simultaneously receives and consumes benefits, or the entity creates an asset with no alternative use and has an enforceable right to payment.^[59][61]
• Point in time: Recognized when control is transferred at a specific moment, such as legal title transfer.^[62]

Practical Example: Real Estate Development (Example 17) The standard illustrates this using a developer building a multi-unit residential complex.^[63] For instance, if a company sells an off-plan apartment where the buyer only pays a small deposit and the developer cannot legally demand payment for work-in-progress, revenue is recognized only at the "point in time" when the keys are handed over (Case A).^[64] However, if the contract is structured so that the buyer is legally obligated to pay for the specific progress made—meaning the developer has an "enforceable right to payment" for work done to date—the company recognizes revenue "over time" as construction progresses (Case B).^[65] In Case C, even if the developer has the option to cancel the contract and take a penalty, the "over time" recognition still applies if the right to full payment remains a valid legal path.^[66] This demonstrates that the accounting is driven by the legal enforceability of the payment terms in the specific jurisdiction rather than the physical state of the building.^[67] Consequently, two identical buildings in different countries might be accounted for differently depending on local property laws.^[68]

Practical Example: Uninstalled Materials (Example 19) A refurbishment contract for CU5 million with expected costs of CU4 million (including CU1.5 million for elevators) illustrates how progress can be distorted by uninstalled materials.^[69] If elevators are delivered to the site but not yet installed, including their cost in the progress calculation would overstate performance; therefore, the entity must exclude these costs from the percentage of completion and recognize revenue for them at a zero margin.^[70] If other costs incurred are CU500,000 out of a remaining CU2.5 million, the performance is calculated as 20% complete.^[71] Consequently, the entity recognizes total revenue of CU2.2 million, consisting of the 20% share of the service component (CU700,000) plus the cost-only reimbursement for the elevators (CU1.5 million).^[72] This results in a profit of CU200,000, ensuring that margin is only recorded on the refurbishment work actually performed.^[73]

Example 19: Revenue Recognition Calculation (CU)

Description	Calculation	Amount
Service Revenue (20% Progress)	20% × (5,000,000 – 1,500,000)	700,000
Elevator Revenue (Zero Margin)	1,500,000 cost recovery	1,500,000
Total Revenue Recognized		2,200,000
Cost of Goods Sold	500,000 (service) + 1,500,000 (elevators)	2,000,000
Total Profit Recognized		200,000

Contract Cost Overview (CU)

Category	Amount
Transaction Price	5,000,000
Expected Costs (Elevators)	1,500,000
Expected Costs (Other)	2,500,000
Total Expected Costs	4,000,000

Practical Example: Volume Rebates and Refund Liabilities (Example 40) If a contract sets a price at CU150 but reduces it retrospectively to CU125 if a customer buys a large volume, the entity must estimate the final price at contract inception.^[74] If the entity expects the customer to meet the threshold, it only recognizes revenue of CU125 per unit, even if it has the legal right to bill CU150.^[75] The difference is recorded as a Refund Liability, representing the amount to be repaid to the customer once the rebate is triggered.^[76]

Example 40: Accounting for First Shipment (100 units)

Account	Calculation	Debit (CU)	Credit (CU)	Explanation
Receivable	100 units × CU150	15,000		Unconditional right to bill.[77]
Revenue	100 units × CU125		12,500	Amount the entity expects to keep.[78]
Refund Liability	100 units × CU25		2,500	Expected rebate to be returned.[79]

Recognition of a contract asset

IFRS 15 introduces the term contract asset for accrued revenue when payment is conditional on something other than the passage of time.^[80] Contract liabilities represent an obligation to transfer goods for which consideration has already been received.^[81] Incremental costs to obtain a contract are capitalized if recoverable.^[82]

Presentation (Contract Assets and Liabilities)

The timing of an entity's performance and the customer's payment determines how the contract is presented in the statement of financial position.^[83]

Practical Example: Advance Payments and Receivables (Example 38) The distinction between a "receivable" and a "contract liability" depends on whether the right to consideration is unconditional.^[84] In a cancellable contract (Case A), if a customer pays CU1,000 in advance on March 1 before the product is delivered on March 31, the entity simply records a "contract liability" upon receipt of the cash.^[85] However, in a non-cancellable contract (Case B), if the payment is legally due on January 31, the entity must recognize both a "receivable" and a "contract liability" on that date, even if no cash has been received and no performance has occurred.^[86] This is because the non-cancellable nature of the contract creates an unconditional legal right to the payment.^[87] Revenue is recognized only when the performance obligation is satisfied (e.g., on March 31), regardless of when the payment was due or received.^[88]

Example 38 Case B: Journal Entries for Non-cancellable Advance

Date	Accounting Event	Journal Entry	IFRS Reference
Jan 31	Payment becomes due	Dr Receivable / Cr Contract Liability	IFRS 15.IE199(a)
Mar 1	Cash is received	Dr Cash / Cr Receivable	IFRS 15.IE199(b)
Mar 31	Product is transferred	Dr Contract Liability / Cr Revenue	IFRS 15.IE199(c)

Disclosures

The objective of the disclosure requirements in IFRS 15 is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows.^[89]

Disaggregation of Revenue

Entities must disaggregate revenue from contracts with customers into categories that depict how economic factors affect the nature and timing of revenue.^[90] These categories often include geographical regions, product lines, and the timing of transfer (point in time versus over time).^[91]

Practical Example: Multi-Segment Quantitative Disclosure (Example 41) A diversified entity with segments in consumer products, transportation, and energy illustrates this by breaking down its total CU 11,500 revenue.^[92] In this scenario, the entity reconciles its disaggregated revenue with the reporting segments required by IFRS 8.^[93] For instance, while most "Consumer Products" revenue (CU 1,990) is recognized at a point in time, the "Energy" segment includes CU 5,250 of revenue from power plants recognized over time, highlighting different risk profiles and cash flow patterns.^[94]

Example 41: Disaggregation of Revenue (CU)

Categories	Consumer	Transport	Energy	Total
Primary geographical markets
North America	990	2,250	5,250	8,490
Europe	300	750	1,000	2,050
Asia	700	260	–	960
Major goods/service lines
Automobiles	–	2,760	–	2,760
Power plant	–	–	5,250	5,250
Timing of revenue recognition
Goods transferred at a point in time	1,990	3,260	1,000	6,250
Services transferred over time	–	–	5,250	5,250
Total Revenue	1,990	3,260	6,250	11,500

Effective date

IFRS 15 is effective for annual reporting periods beginning on or after January 1, 2018.^[95] The standard allows for either a full retrospective application or a modified retrospective approach upon adoption.^[96]