In May 2014, the International Accounting Standards Board (IASB) published IFRS 15 which replaces IAS 18 Revenue, IAS 11 Construction Contracts and their associated interpretations.
IFRS 15 removes inconsistencies and weaknesses in previous revenue requirements, provides a more robust framework and improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. It is intended to provide more useful information to users of financial statements through improved disclosure requirements and to simplify the preparation of financial statements by reducing the number of separate documents to which an entity must refer. IFRS 15 comes into effect for periods commencing on or after 1 January 2018.
IFRS 15 sets out a single framework for revenue recognition. Its core principle is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. IFRS 15 sets out five key steps to follow in applying this core principle.
The final step in this process is to recognise revenue when (or as) the entity satisfies a performance obligation. This could potentially require a fair amount of judgement to be applied. The focus here is on the transfer of ‘control’ rather than ‘risks and rewards’ when determining when to recognise revenue. Timing of revenue recognition requires the evaluation of whether control transfers (and therefore the performance obligation is satisfied) over time or at a point in time. If a performance obligation is not satisfied over time, then it is satisfied at a point in time.
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 directing the use of, and obtaining the benefits from, an asset.
If you are uncertain as to what the impact of IFRS 15 will be on your business, please contact us for assistance.