IFRS 15 is a set of guidelines that outlines the accounting principles that companies should follow when recognizing revenue from contracts with customers. It applies to all types of contracts with customers, including those for the sale of goods, the provision of services, and the licensing of intellectual property. The standard replaces previous revenue recognition guidance, and it is applicable to all industries that enter into contracts with customers.
Under IFRS 15, revenue should be recognized when control of a good or service transfers to a customer. This means that revenue should only be recognized when the customer has obtained the ability to direct the use of the good or service and obtain the benefits from it. The standard sets out a five-step model for recognizing revenue:
Identify the contract with the customer
Identify the performance obligations in the contract
Determine the transaction price
Allocate the transaction price to the performance obligations
Recognize revenue when the performance obligations are satisfied
IFRS 15 introduces the concept of performance obligations, which are promises to transfer goods or services to a customer. If a contract contains more than one performance obligation, the transaction price must be allocated to each performance obligation based on its relative stand-alone selling price.
The standard also provides guidance on when to recognize revenue over time and when to recognize revenue at a point in time. If a performance obligation is satisfied over time, revenue should be recognized based on the progress toward completion of the obligation. If a performance obligation is satisfied at a point in time, revenue should be recognized when control of the good or service transfers to the customer.
A company enters into a contract with a customer to provide maintenance services for a period of three years. The transaction price is $100,000, and the stand-alone selling price for each year of maintenance is $40,000. The company must recognize revenue over time, based on the progress toward completion of the performance obligation. If the company completes 25% of the maintenance work in the first year, it should recognize revenue of $10,000 (25% of $40,000) in the first year.
A software company enters into a contract with a customer to license its software for a period of five years. The transaction price is $50,000, and the stand-alone selling price for the software is $10,000 per year. The company must allocate the transaction price to each year of the license, recognizing revenue over time. If the customer pays $50,000 upfront for the five-year license, the company should recognize revenue of $10,000 in each year of the license period.
One company that has been impacted by IFRS 15 is the pharmaceutical company Pfizer. In 2018, Pfizer adopted the new revenue recognition standard and restated its financial statements for 2016 and 2017. The company had to change its accounting for certain contracts, which resulted in a $229 million reduction in revenue for 2017.
Another company impacted by IFRS 15 is the technology company Apple. In its 2018 annual report, Apple disclosed that the new revenue recognition standard had a significant impact on its financial statements. The company had to change its accounting for certain contracts, resulting in a $1.8 billion reduction in revenue for the first quarter of 2018.
In 2020, the International Accounting Standards Board (IASB) issued amendments to IFRS 15 to clarify certain aspects of the standard. The amendments provide additional guidance on how to determine whether a company is acting as a principal or an agent in a contract with a customer. The amendments also clarify the accounting for certain types of contract modifications and provide additional guidance on the disclosure requirements of the standard