IFRS 15- Revenue from contracts with

customers
IFRS 15 defines revenue as ‘Income arising in the course of an entity’s ordinary activities. Revenue does
not include:

• Proceeds from sale of non-current assets

• Sales tax and other similar taxes

• Other amounts collected on behalf of others. For example, in an agency relationship, the agent would
only recognise commission.

The five step process to revenue recognition can be fulfilled through the acronym (COPAR):

• Contract

• Obligations

• Price

• Allocate price

• Recognise revenue.

Step 1 (CONTRACT) -Identify the contract

IFRS 15 Revenue from contracts with customers says that a contract is an agreement between two or
more parties that creates rights and obligations. A contract does not need to be written. An entity can
only account for revenue if the contract meets the following criteria:

• The parties to the contract have approved and are committed to fulfilling the contract

• Each party’s rights can be identified

• The payment terms can be identified

• The contract has commercial substance, and

• It is probable that the entity will be paid.

Step 2: (OBLIGATIONS)-Identifying the separate performance obligations within a contract

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Performance obligations are promises to transfer distinct goods or services to a customer. Some
contracts contain more than one performance obligation. For example:

• An entity may enter into a contract with a customer to sell a car, which includes one year’s free
servicing and maintenance

• An entity might enter into a contract with a customer to provide a course of 5 lectures, as well as to
provide a textbook on the first day of the course.

The distinct performance obligations within a contract must be identified. An entity must decide if the
nature of a performance obligation is:

• To provide the specified goods or services itself (i.e. it is the principal), or

• To arrange for another party to provide the goods or service (i.e. it is an agent).

If an entity is an agent, then revenue is recognised based on the fee or commission to which it is
entitled.

Step 3 (PRICE): Determining the transaction price

In accordance to IFRS 15 Revenue from contracts with customers, the transaction price is the amount of
consideration an entity expects in exchange for satisfying a performance obligation. When determining
the transaction price, the following must be considered:

a) Variable consideration - If a contract includes variable consideration (for example, a bonus

based on delivery of the contract), it shall be included within ‘the transaction price if it is highly
probable that a significant reversal in the amount of cumulative revenue will not occur when the
uncertainty is resolved’.

b) Significant financing components- Financing In determining the transaction price, an entity must
consider if the timing of payments provides the customer or the entity with a significant
financing benefit. The existence of a financing element to the sale can be indicated by:

• A difference between the amount paid and the cash selling price

• An extended time period between the transfer of the goods or service and the payment date.
If there is a significant financing component, then the consideration receivable needs to be
discounted to present value using the rate at which the customer would borrow.

c) Non-cash consideration- Customers do not always pay using cash or credit. The customer may
pay using shares in their entity, share options or using other assets. Any non-cash consideration
should be valued at fair value.

d) Consideration payable to a customer- Sometimes amounts are paid to customers as part of the
contract. These payments are often an incentive to encourage completion of the sale. If
consideration is paid to a customer in exchange for a distinct good or service, then it is
essentially a purchase transaction and should be accounted for in the same way as other

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 purchases from suppliers. For example, suppliers may sell their produce to supermarkets but
may also have to pay the supermarket for shelf space. If the consideration paid to a customer is
not in exchange for a distinct good or service, an entity should account for it as a reduction of
the transaction price. For example, a car manufacturer sells their newest model electric cars to
car dealerships but has to pay the dealer to install chargers at the dealer’s premises.

Step 4: Allocate the transaction price -The total transaction price should be allocated to each
performance obligation in proportion to stand-alone selling prices. The best evidence of a stand-alone
selling price is the observable selling price of a good or service sold separately. If a stand-alone selling
price is not directly observable, then the entity estimates the stand-alone selling price.

In relation to a bundled sale, any discount should generally be allocated across each component in the
transaction. The entire discount should only be allocated to a specific individual component of the
transaction if that component is regularly sold separately at a discount.

Step 5: Recognise revenue

Revenue is recognised 'when (or as) the entity satisfies a performance obligation by transferring a
promised good or service to a customer.’ At the start of a contract, for each performance obligation
identified, an entity must determine whether it satisfies the performance obligation:

• At a point in time- The performance obligation is satisfied at a point in time when a

customer obtains control of a promised asset. Control of an asset refers to the ability to
direct the use of, and obtain substantially all of, the remaining benefits from the asset.
Control includes the ability to prevent other entities from obtaining benefits from an
asset i.e. an entity can restrict the assets use. The following are indicators of the transfer
of control:
• ‘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
• The customer has accepted the asset.’

• Over time

Consignment inventory
Consignment inventory is inventory which:

• is legally owned by one party

• is held by another party, on terms which give the holder the right to sell the inventory in the normal
course of business or, at the holder’s option, to return it to the legal owner.

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Inventory is legally owned by the manufacturer until:

• the dealer sells inventory onto a third party, or

• the dealer’s right to return expires and the inventory is still not sold.

However, the inventory is physically held by the dealer.

Revenue should only be recorded if control of the asset sold transfers to the third party customer.
Consignment inventory meets most of the conditions described above for recording revenue at a point
in time. However, particular attention should be paid to the need for the customer to hold the risks and
rewards of ownership.

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Sale and repurchase agreements
A sale and repurchase agreement is where an entity sells an asset but retains a right to repurchase the
asset at some point in the future.

Sale and repurchase agreements are common in property developments and in maturing inventories
such as whisky or cheese. The asset has been ‘legally’ sold, but there is either a commitment or an
option to repurchase the asset at a later date.

The point in time at which to recognise revenue depends upon whether the control has transferred to
the customer.

Factors to consider when determining who has control of the asset:

• Has the entity transferred the risks and benefits of the asset? e.g. can the entity still use the asset?
Does the entity bear costs associated with the asset?

• Was the asset "sold" at a price different to market value?

• Is the entity obliged to repurchase the asset?

• If the entity has the option to repurchase the asset are they likely to exercise this option?

• Is the sale is to a bank or financing company?

• Is repurchase at a fixed price or market value?

Accounting for revenue recorded over time

'For each performance obligation satisfied over time, an entity shall recognise revenue over time by
measuring the progress towards complete satisfaction of that performance obligation' (IFRS 15, para
39). Methods of measuring progress include:

• Output methods (such as surveys of performance or time elapsed as a proportion of total contract
price/time)

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• Input methods (such as costs incurred to date as a proportion of total expected costs). As a result,
revenue will be recognised based on the amount of progress made compared to the total price.

Contract costs
IFRS 15 says that the following costs must be capitalised:

• The incremental costs of obtaining a contract

• The costs of fulfilling a contract if they do not fall within the scope of another standard (such as IAS 2
Inventories) and the entity expects them to be recovered.

The capitalised costs will be amortised as revenue is recognised. This means that they will be expensed
to cost of sales as the contract progresses. These will be matched to revenue based on either the input
or output method of measuring progress. Cost of sales will be measured as % progress made × total
costs.

Step 1 – Calculate overall profit or loss (if loss, recognize immediately)

Step 2 – Determine the progress towards completion (cost base/work certified base)
Step 3 – Determine figures for inclusion in the statement of profit or loss
Step 4 – Determine figures for inclusion in the statement of financial position.

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