This blog is written by Mr. Ajmal Khan, Director, Khilji and Co Chartered Accountants. Please read this First part of the blog and provide your valued comments.

IFRS-15- Revenue from Contracts With Customers


  • To establish the principles  that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer.
  • To meet the objective the core principle of this standard is that an entity shall recognize  revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity is expects to be entitled in exchange for those goods or services.


IFRS summarize five steps that an entity applies when recognizing revenue;

  1. Identify the contract with customer.
  2. Identify the performance obligations in the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to performance obligation in the contract.
  5. Recognize revenue when the entity satisfies a performance obligation.

Scope of IFRS-15

An entity shall apply this standard to all contracts with customers, except the following:

  1. Lease contracts within the scope of IFRS-16
  2. Contracts within the scope of IFRS-17 (Insurance Contracts) except warranty for goods & services, contractual rights or obligations contingent upon future events, license fees, royalties, contingent lease payment. IFRS-16, IAS-38  residual value guarantees embedded in lease agreement etc.
  3. Financial instruments & other contractual rights & obligations under IFRS-9, IFRS-10 consolidated FS, IFRS-11 Joint arrangements, IAS-27and IAS-28.
  4. Non monitory exchanges between entities in the same line of business to facilitate Sales to customers. Contracts between two oil companies to exchange oil to meet market demand.

Basic concepts of understanding the scope of IFRS-15

  • An entity shall apply this standard to a contract other than listed above only if the counter party to the contract is a customer.
  • A customer  is party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.

A counter party to the contract is not a customer if he has contracted to participate in an activity or process in which the parties to the contract share in the resulting risk and benefits

Application of IFRS-15

  • Individual contract with a customer.
  • Portfolio of contracts (performance obligations) with similar characteristics if the entity reasonably expects that the effects on the financial statements of applying this standard to the portfolio would not materially differ from applying this to the individual contracts (or performance obligations).

Partial application of IFRS-15

  • A contract with customer may be partially within the scope of this standard and partially within the scope of other standards.
  • If the other standards specify how to separate/initially measure one or more part of the contract, then the entity shall first apply the separation and measurement requirements in those standards.
  • An entity shall exclude from the contract price the amount of the part of contract which are initially measured in accordance with other standards and apply this standard to allocate remaining amount to each performance obligation within the scope of this standard.
  • If other standards do not specify the separation and initial measurement of one or more part of the contract then the entity shall apply this standard to separate and initially measured the parts of the contract.

Criteria for recognition

An Entity shall account for a contract with a customer that is within the scope of this standard only when all of the following criteria are met;

  • The parties to the contract have approved the contract and are committed to perform their respective obligations.
  • Rights are obligation for goods & services are identified.
  • Payment terms for goods & services to be transferred are identified.
  • The contract has commercial substance (risk, timing or amount of future cash flows is expected to change as a result of contract).
  • It is probable that the entity will collect the consideration to which it will be entitled in exchange for goods & services. The probability is linked with the customer’s ability and intention to pay the amount.

Assessment & Reassessment of contract:

  • Once the recognition criteria have been met the entity shall not reassess those criteria unless there is an indication of significant change in facts and circumstances. (e.g customer’s ability and intention to pay the consideration).
  • If the contract with customer does not meet the recognition criteria the entity shall continue to assess the contract to determine whether the criteria have been subsequently met.

Contracts not meeting the recognition criteria:

When a contract does not met the recognition criteria and the entity receives consideration from the customers, the entity shall recognize the consideration received as revenue when either of following events has occurred;

  • The entity has no remaining obligation to transfer  goods & services to the customers and all or substantially all of the consideration promised by the customers has been received  and is non refundable.
  • The contract has been terminated  and the consideration received from the customers is nonrefundable.
  • The consideration received shall be recognized as liability until any of the above events occurs or recognition criteria have been met subsequently.

Combination of contracts:

An entity shall combine two or more contracts entered at or near the same time with the same customer or related parties of customer and account for the contract as single contract if one or more of following criteria are met;

  • The contract are negotiated as a package with single commercial objectives
  • The amount of consideration to be paid in one contract depends upon  the price or performance of other contract.
  • The goods or services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation.

Modification of contracts:

  • A contract modification is a change in the scope or price (or both) of the contract that is approved by the parties to the contract.
  • Some modification may be change order, a variation or amendment. A modification exists when parties to the contract approve it that either creates new or change existing enforceable rights & obligations of the parties.
  • Approval may be written, oral or implied b customary business practices.
  • An entity shall apply this standard to the existing contract until the modification is approved.
  • Modification may exists even parties to the contract have a dispute about the scope and price (or both) of the modification. parties have approved the change in the scope of contract but has not yet finalized the price of modification.

Modification as separate contract:

An entity shall account for a contract modification as a separate contract if both of the following conditions are present;

  • The scope of the contract increases because of the addition of promised goods and services that are distinct.
  • The price of the contract increases by an amount of consideration that reflects stand-alone selling price for the additional promised goods & services.

To be continued

Ajmal Khan