UNIT 2

IFRS 15

REVENUE FROM CONTRACTS WITH

CUSTOMERS

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• Learning outcome: Revenue from contracts with customers in terms of
IFRS 15 should be defined, calculated and recorded.

• Assessment Criteria: The student should be able to:

1.Define different terms within IFRS 15.
2. Determine how and when should the IFRS 15 transaction be
measured and recoded in the general journal.

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 INTRODUCTION
• IFRS 15 was released in May 2014.
• Effective for financial years beginning on or after 1
January 2018.
• This standard deals with contracts and where these
contracts involve customers.
• Interest income, Interest expense and time value of
money must be excluded.
• VAT should be excluded if a company is a VAT
vendor.

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• Contract: An agreement that results in the parties to the agreement having rights
and obligations that are enforceable. It is advisable to have this contract in writing.

• Customer: A party who has come to an agreement with the entity, promising to
give some form of consideration in exchange for goods or services that the entity
promises to provide a part of its ordinary activities.

• NB: The contract that is not of the entity's ordinary activities is not accounted for
under IFRS 15.

• IFRS 15 is not the only standard dealing with revenue. IFRS 15 applies only if other
revenue standards do not apply.

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 INCOME VERSES REVENUE
INCOME
• Increase in economic benefits
• during the accounting period
• in the form of inflow,
• enhancement of assets or
• decrease in liabilities
• that result in increases in equity
• other than those relating to contributions from equity participants.
REVENUE
• Income arising in the ordinary course of an entity

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 REVENUE RECOGNITION AND MEASUREMENT
For the revenue from contracts with customers to be recognised and
measured the following 5-step process needs to be followed:
STEP 1: Identify the contract/s with a customer;
STEP 2: Identify the performance obligations in the contract;
STEP 3: Determine the transaction price;
STEP 4: Allocate the transaction price to the performance obligations in
the contract; and
STEP 5: Recognise revenue when/as the entity satisfies a performance
obligation.

NB: All the above must be meet before revenue can be in existence.
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 RECOGNITION OF IFRS 15
When deciding if and when to recognise revenue, steps 1, 2 and 5 should be considered.
Step 1- When there is a legally enforceable contract.
• These contracts need to be enforced by law.
• If there is no enforceable contract with the customer then IFRS 15 does not apply.

Step 2- Performance obligation must be identified.

• Contract may include a commitment to provide a variety of goods or a variety of
services or a combination thereof.
• Each goods, services or bundle of both must be recognised separately.

Step 5 - As and when the entity satisfied/completes its performance obligation. This
happens when the customer has a control over the goods and/or services.

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 MEASUREMENT OF IFRS 15
• Once the entity has decided to recognise revenue,
• based on steps 1,2 and 3,
• the journal entries need to be processed.
• In order to process these entries,
• the amount of the journals need to be known.
• This referred as measurement.
• When deciding on the measurement of revenue, IFRS 15 considers
step 3 and step 4.

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 MEASUREMENT OF IFRS 15
Step 3
• The amount that the entity will be collecting from the customer should be determined
on this stage.
• This is called the transaction price.
• This price must exclude the money to be collected on behalf of the third party, i.e. VAT.
Step 4
• Allocation of transaction price.
• If a contract involves more than one performance obligation, the transaction price will
need to be allocated to each separate obligation.
• If the contract involves only a single performance obligation, the contract’s entire
transaction price will apply to that single obligation.
• If the obligation performance will be completed in an instant, the related revenue will
be recognised at that point in time.
• If the obligation performance will be completed over time, then the related revenue
will be measured based on the progress towards complete satisfaction of the
performance obligation.

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 PRESENTATION OF IFRS 15
• Revenue must be presented as a line-item in SOCI.
• A customer contract may also lead to the presentation in SOFP as a contract asset or contract
liability and/or as a receivable.
Contract liability:
• Recognised when the entity either receives the consideration or obtains unconditional right
to this consideration, whichever happens first.
• Reflects the obligation to either return any amounts received or to satisfy performance
obligation.

Contract asset:
• Recognised when the entity has a right to conditional consideration.

Receivable:
• Recognised when the entity has a right to unconditional consideration.

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 CANCELABLE AND NON-CANCELABLE CONTRACTS
• Unconditional right to consideration arises only when the performance obligation
has been satisfied.
• However, unconditional right can arise before the performance obligation is being
met.
• This happens, if the contract is non-cancellable.
• If the entity enterers into a non-cancellable contract, the date on which the
customer is required to make payment is the date on which the entity obtains an
unconditional right to the consideration, even if the entity has not performed
their obligation.
• The due date for payment is very important if the contract is non-cancellable, as
it becomes the date on which the entity obtains an unconditional right to receive
the consideration.

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 IDENTIFYING THE CONTRACT
A contract is said to exist if it meets all of the following five criteria:
• If it is approved by all parties who are also committed to fulfilling their
obligations;
• If each party’s rights to the goods and/or services are identifiable;
• If the payment terms are identifiable;
• If the contract has commercial substance; and
• It is probable that the entity will collect the consideration to which it
expects to be entitled.

• NB: A contract will not exist if any one of the above criteria are not met.

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 THE CONTRACT MAY BE DEEMED NOT TO
EXIST
• A contract will not exist if any of the five criteria is not
met.
• However, even if all criteria are met, the contract will
be deemed not exist if:
• Each party to the contract has a ‘unilateral
enforceable right to terminate’ a ‘wholly unperformed
contract’, without providing any compensation to the
other party/ies.
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