IFRS 15 Series Episode 1: An Introduction
Everyone makes transactions daily – from buying from a physical store to placing orders on online stores. Customers’ obligation is to give cash in exchange for the goods or services demanded.
What does IFRS 15 say for your supplier and Vendor? Do they (suppliers) just collect payment and recognize same in their accounting books immediately?
IFRS 15 states the requirement for the recognition of revenue by entities, how and when the revenue should be recognized in the books and disclosure of relevant information related to revenue in the financial statements.
Prior to the issuance of IFRS 15, a number of standards and interpretations which guided the recognition of revenue existed – Standards – IAS 11, IAS 18 and Interpretations – IFRIC 13, IFRIC 15, IFRIC 18 and SIC 31 were all replaced by this single standard. One purpose for the collapse of all these into just one standard is to provide a one-stop standard for the recognition of revenue. This has made it easier for entities to recognize revenue as they just look into one standard for clarifications instead of different standards.
IFRS 15 provides the requirement for the recognition of revenue from CUSTOMERS. Yes, customers in capital letters because not everyone who is involved in transaction with an entity is a customer. Some are agents, representative, trustee or middlemen.
IFRS 15 defines a customer as ‘a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration'. For instance, for Mike to be Mercy’s customer, Mike must have contracted Mercy to provide a good or service that Mercy usually sells in exchange for a consideration from Mike which can be in cash or asset or provision of another service.
Disposal of non-financial assets that are not output of normal operation of an entity – such as disposal of motor vehicle, and property, plant and equipment are also within the scope of IFRS 15. In simpler terms, IFRS 15 covers all contracts with customers, and disposal or sale of non-currents assets owned by an entity. However, transactions involving Leases (IAS 17 – now IFRS 16), Insurance contracts (IFRS 17) and Financial instruments (IFRS 9) are not within the scope of IFRS 15.
In situations where transactions are partially within the scope of IFRS 15 and partially within the scope of other standards, entities are required to measure such transactions with respect to the other standard before applying the requirements of IFRS 15.
IFRS 15 provides 5 key step-by-step principles in the recognition of revenue for entities, the principles are as follows:
- Identify the contract(s) with the customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price
- Recognize revenue when a performance obligation is satisfied
In subsequent IFRS 15 series, the 5 key IFRS 15 principles will be explained in-depth in an easy-to-understand way. Don’t forget to bookmark the website and also click on the email subscription button to stay up-to-date with us.
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