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IFRS15 was developed to address differences in the definition of revenue between the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB). It is an International Financial Reporting Standard (IFRS) initiated by the IASB that provides guidance on accounting for revenue derived from customer contracts. It is a joint project with the FASB, which issues accounting guidance in the United States and becomes effective 1st January 2018. Broader impact:Changing revenue recognition methods will impact many parts of an organisation including financial accounting, IT, executive management, sales, legal, human resources, tax, investor relations, share and bond holders. Revenue modelThe IFRS15 revenue model has five steps:
1) Identify contract with a customer
According to IFRS 15, the following criteria have to be met before a contract can be identified:a - Each party has to approve the contract and be committed to its fulfillment.b - Each party’s rights and obligations can be identified in terms of the contract, there are clear payment terms in the contract and the contract has “commercial substance”.
2) Identify individual performance obligations within the contract
A good or service that is to be delivered in terms of a contract with a customer qualifies as a performance obligation if the good or service is “distinct”. In this context a good or service is distinct if the contracted item can be consumed by the customer, either on its own, or in combination with other items that are regularly available to the customer and the promise to transfer goods or services to a customer can be separately identified from other transfers stipulated in the contract.
3) Determine transaction price
In most cases the transaction price payable is laid out in the contract and is simple to calculate, however certain circumstances require the transaction price to be calculated by other methods.
4) Allocate the price to the performance obligations
Firstly, an entity has to measure the amount of non-cash consideration in a contract in terms of IFRS 13: fair value measurement. Secondly, a contract can have variable consideration (for example, the transaction price is subject to settlement discount should the client pay within a certain time frame). In this case, the transaction price can be calculated by two methods:
1) The most likely amount (the amount with the highest probability of being realized will be measured as the transaction price)
2) The expected value approach. In this instance the weighted average of possible amounts is measured as the transaction price.
Both methods are estimates and if the actuals differ, the entity will apply the change retrospectively.
Finally IFRS15 requires the entity to test for the existence of a “significant financing component” in the contract, which will occur if: “the timing of payments agreed by the parties to the contract provides the customer or the entity with a significant benefit of financing the transfer of goods or services to the customer”.
If the above mentioned is applicable, the transaction price will be adjusted to eliminate the effect of this benefit. This is simply done by calculating the net present value of the payments (if the satisfaction of performance obligations is prior to the payment date), or by calculating the net future value (if the payment date is prior to the satisfaction of performance obligations). The difference (between the amount recognized after adjustment for a significant financing component and amount of consideration to be received) is simply recognized as interest income/expense in terms of the accrual basis of accounting as mentioned in IAS 1.
5) Recognize revenue as the performance obligations are fulfilled
An entity can recognize revenue when performance obligations have been settled defined as when the customer has received all the benefits associated with the performance obligation and is able to use and enjoy the asset.