IFRS 15 is the standard that prescribes requirements and guidance on how to record and report revenue. What is revenue? It is important to keep in mind the definition of revenue. “Revenue is income (increase in economic benefits) arising in the course of an entity’s ordinary activities”. How is revenue generated? In most of the cases, an entity either provides any goods (e.g. sale of cars, computers, crockery etc.) or services (e.g. banking, medical, consultancy, hair dressing etc.) to its customers. In exchange, the entity receives a consideration for the goods or services transferred. The core principle of IFRS 15 is that an entity should record revenue
- in the manner that depicts the transfer of goods or services to customers
- at an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services
To follow this principle, IFRS 15 has introduced a five step model:
STEP – 1: Identify the contract with customer
STEP – 2: Identify performance obligations
STEP – 3: Determine the transaction price
STEP – 4: Allocate the transaction price to performance obligations
STEP – 5: Recognize revenue as and when the entity satisfies a performance obligation
Each of the above mentioned step is explained in detail in separate articles. Other than the main 5 step model, there are some other aspects of IFRS 15 which are also important to understand. Following is a list of these concepts:
- Combining contracts
- Modification of contracts
- Variable consideration
- Incremental costs to obtain a contract
- Costs to fulfill a contract
- Portfolio approach
- Customer loyalty programs