Revenue from Contracts with Customers
2027 IAC Financial Reporting โข Level 3IFRS 15 establishes the principles for recognising revenue from contracts with customers. For PGDA and IAC purposes, the standard should be approached primarily through its five-step revenue recognition model.
Recognise 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.
Contract โ Performance Obligations โ Price โ Allocate โ Recognise
The 2027 IAC Principles of Examination place IFRS 15 at Level 3, subject to specific exceptions.
Level 3 means you should not merely be able to explain IFRS 15. You should be able to apply it to complex routine situations, integrate it with other IFRS requirements, and exercise judgement.
| Topic | Level | Study approach |
|---|---|---|
| Changes in transaction price | LEVEL 2 | Understand and apply the basic principles. |
| Principal vs agent | LEVEL 2 | Focus on control and gross vs net revenue. |
| Customer options for additional goods/services | LEVEL 2 | Focus on whether the option provides a material right. |
| Customer unexercised rights | LEVEL 2 | Understand breakage principles. |
| Repurchase agreements | LEVEL 2 | Focus on whether control transfers. |
For this course, contract identification is Level 1. Understand the basic recognition requirements rather than spending disproportionate study time on detailed application.
The contract must satisfy the relevant IFRS 15 criteria, including approval, identifiable rights and payment terms, commercial substance and collectability.
Contracts entered into at or near the same time with the same customer may need to be accounted for as a single contract where the relevant IFRS 15 requirements are met.
A contract modification changes the scope and/or price of an existing contract. Your IAC syllabus treats modifications as Level 1.
Before calculating revenue, identify exactly what the entity has promised to transfer to the customer.
A performance obligation is a promise to transfer to the customer a distinct good or service, or a series of distinct goods or services that are substantially the same and have the same pattern of transfer.
| Promise | Potential PO |
|---|---|
| Machine | Performance obligation |
| Installation | Performance obligation if distinct |
Do not assume that every item mentioned in a contract is automatically a separate performance obligation. Analyse whether the promised goods/services are distinct.
Determine the amount of consideration to which the entity expects to be entitled.
Variable consideration can arise from bonuses, penalties, rebates, discounts, refunds, volume incentives and similar arrangements.
Probability-weighted amount of possible outcomes.
The single most likely amount in the range of possible consideration. Particularly useful where there are only two possible outcomes.
Include variable consideration only to the extent that it is highly probable that a significant reversal of revenue will not occur when the uncertainty is subsequently resolved.
Consider whether the timing of payments provides a significant financing benefit to either the customer or the entity.
An entity may elect not to adjust for a significant financing component when the period between transfer of the promised goods/services and payment is expected to be one year or less.
Consideration received in a form other than cash is generally measured at fair value, subject to the requirements of IFRS 15.
Allocate the transaction price to each performance obligation based on the relative stand-alone selling prices.
Contract price = R900,000
| Performance obligation | SSP |
|---|---|
| Machine | R800,000 |
| Installation | R400,000 |
| Total | R1,200,000 |
R600,000 + R300,000 = R900,000
The stand-alone selling price is the price at which the entity would sell the promised good or service separately to a customer. If directly observable, use the observable price. If not, an appropriate estimation method must be applied.
Revenue is recognised when, or as, a performance obligation is satisfied by transferring control of the promised good or service to the customer.
Revenue is recognised when control transfers to the customer.
Revenue is recognised progressively as the performance obligation is satisfied.
When revenue is recognised over time, measure progress toward satisfying the performance obligation.
Contract revenue = R10 million; estimated total costs = R8 million; costs incurred to date = R2 million.
Do not automatically assume that cost-to-cost is the correct measure of progress. The selected method must faithfully depict the transfer of control to the customer.
If the performance obligation is not satisfied over time, revenue is recognised when control transfers.
Consider indicators such as:
| Situation | Accounting concept |
|---|---|
| Entity has performed but its right to consideration is still conditional on something other than passage of time. | Contract asset |
| Entity has an unconditional right to consideration. | Receivable |
| Customer has paid or consideration is due before the entity has satisfied its performance obligation. | Contract liability |
Performed but conditional โ Contract asset
Performed and unconditional โ Receivable
Paid before performance โ Contract liability
These are costs that would not have been incurred if the contract had not been obtained. A classic example is a sales commission payable only when a contract is successfully obtained.
If the amortisation period of the asset that would otherwise be recognised is one year or less, an entity may elect to expense the incremental costs.
Capitalised contract costs are amortised systematically in a manner consistent with the transfer to the customer of the goods/services to which the asset relates.
Contract cost assets are subject to the applicable IFRS 15 impairment requirements.
When customers have a right to return products, the entity does not simply recognise revenue for the full amount sold.
Generally provides assurance that the product complies with agreed specifications. Consider IAS 37 for the related obligation.
Provides an additional service and may constitute a separate performance obligation under IFRS 15.
Ask:
Principal: generally recognises revenue on a gross basis.
Agent: generally recognises its fee or commission on a net basis.
Determine whether the option provides the customer with a material right. If it does, the option is generally treated as a separate performance obligation and part of the transaction price is allocated to it.
Consider whether the entity expects to be entitled to amounts relating to unexercised customer rights. Expected breakage may be recognised as revenue in accordance with the applicable IFRS 15 requirements and pattern of exercise.
Ask what good or service the customer receives in exchange for the upfront fee.
If the upfront activity does not transfer a distinct good or service, the fee may form part of the consideration for other performance obligations.
Focus on whether control of the asset has actually transferred to the customer. Depending on the arrangement, different accounting consequences may arise.
Delivery of goods to another party does not automatically mean that control has transferred. In a consignment arrangement, revenue is generally not recognised merely because the goods have been delivered to the consignee.
Physical possession may remain with the seller even though control has transferred to the customer. Revenue recognition therefore requires analysis of whether the IFRS 15 requirements for a bill-and-hold arrangement have been satisfied.
A company sells a machine, installation service and two-year maintenance contract for R1,500,000.
| Performance obligation | Stand-alone selling price |
|---|---|
| Machine | R1,200,000 |
| Installation | R300,000 |
| Maintenance | R600,000 |
| Total | R2,100,000 |
| PO | Revenue | Recognition |
|---|---|---|
| Machine | R857,143 | When control transfers |
| Installation | R214,286 | When performance obligation is satisfied |
| Maintenance | R428,571 | Over 24 months if satisfied over time |
Not necessarily. Determine what service the fee relates to.
Not automatically. Apply the variable consideration constraint.
Not necessarily. Determine whether control transferred.
Not necessarily. Consider bill-and-hold arrangements.
Analyse whether the promised goods/services are distinct.
Payment before performance generally creates a contract liability until the performance obligation is satisfied.
Consider whether the arrangement is a consignment and whether control transferred.
Deferred tax implications of revenue recognition and related assets/liabilities.
Particularly relevant to assurance-type warranty obligations.
Potential interaction with receivables and financing considerations.
Relevant where fair value measurement is required.
Use this checklist as you work through the standard.
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What has the entity promised, how much consideration belongs to each promise, and when does control of each promise transfer to the customer?
