This blog is written by Mr. Ijaz Ahmed Tajjak, Assistant Manager Audit and Assurance Services. Please read this blog and provide your valued comments.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 replaces the following standards & interpretation.
- IAS 11 Construction contracts;
- IAS 18 Revenue;
- IFRIC 13 Customer Loyalty Programmes;
- IFRIC 15 Agreements for the Construction of Real Estate;
- IFRIC 18 Transfers of Assets from Customers; and
- SIC 31 Revenue- Barter Transactions Involving Advertising services
A five step model has been introduced to identify the revenue arising from Revenue from Contracts with Customer.
Step 1: identify the contract
Step 2: identify performance obligation
Step 3: Determine transaction price
Step 4: Allocate transaction price
Step 5: Recognize revenue
We here to discuss the last one when will the entity recognises the revenue arising from the contract with customer.
- Control (IFRS 15.31)
An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (that is, an asset) to a customer. An asset is transferred when
(Or as) the customer obtains control of that asset.
A performance obligation is satisfied when control of the promised good or service is transferred to
Control of goods or services will be effective when the customer has the ability to direct the use and obtain all the remaining benefits of the goods or services. Further the management of the entity should evaluate the transfer of control from the customer point of view, which will reduce the risk that revenue is not overstated.
- Performance obligations satisfied over time or at a point in time
A performance obligation may be satisfied at a point in time in usually in transfer of goods.
A performance obligation may be satisfied over time in usually in transfer of services.
Methods for measuring revenue over time
The boards noted in the basis for conclusions to the revenue standard that selection of a method is not simply an accounting policy. Management should select the most appropriate method for measuring the progress of transfer of goods or services
The output method measures results achieved. To recognise revenue by measuring value to customer goods or services.
- Surveys of work performed;
- Units produced as a percentage of total units to be produced;
- Units delivered as a percentage of total units to be delivered; or
- Contract milestones achieved
It measures how much effort has been put into satisfying a contract
- Cost incurred as a percentage of total cost to be incurred.
- Labour hours used as a percentage of total labour hours to be used;
- Machine hours used as a percentage of total machine hours to be used;
Methods for measuring revenue at a point in time
- The entity has a present right to payment.
- The customer has legal title.
- The customer has physical possession.
- The customer has the significant risks and rewards of ownership.
- The customer has accepted the asset.
Ijaz Ahmed Tajjak