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| International Accounting standard(IAS) |
What is the International financial reporting standards (IFRS-15)? Describes in details:
IFRS-15(International Financial Reporting Standard-15) is a standard issued by the International Accounting Standards Board (IASB) that provides a comprehensive framework for recognizing revenue from contracts with customers. It replaces previous revenue recognition standards (including IAS 18 and IAS 11) and introduces a consistent approach to revenue recognition across industries and transactions.
Key aspects of IFRS 15 include:
1.Core Principle:
The core principle of IFRS 15 is that revenue should be recognized when control of a good or service is transferred to the customer, in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services.
2.Five-Step Revenue Recognition Model:
Step 1: Identify the contract with the customer.
A contract is an agreement between two or more parties that creates enforceable rights and obligations.
Step 2: Identify the performance obligations in the contract.
A performance obligation is a promise to transfer a distinct good or service to the customer.
Step 3: Determine the transaction price.
The transaction price is the amount the entity expects to receive from the customer, including any variable consideration (e.g., discounts, rebates, incentives).
Step 4: Allocate the transaction price to the performance obligations.
If the contract has multiple performance obligations, the transaction price should be allocated based on the relative standalone selling prices of each good or service.
Step-5: Recognize revenue when (or as) the entity satisfies a performance obligation.
Revenue is recognized when the customer gains control of the goods or services, which can occur over time or at a point in time, depending on the nature of the performance obligation.
3.Performance Obligations:
IFRS 15 emphasizes the importance of identifying distinct goods or services in a contract and recognizing revenue for each separate performance obligation. A performance obligation is considered distinct if the customer can benefit from it on its own or with other resources readily available to them.
4.Variable Consideration:
The standard requires that variable consideration (e.g., discounts, bonuses, royalties) be included in the transaction price if it is highly probable that a significant reversal of revenue will not occur when the uncertainty is resolved.
5.Contract Costs:
Costs to obtain or fulfill a contract (such as commissions or costs incurred to set up a contract) should be recognized as assets if they meet certain criteria and amortized over the contract's duration.
6.Licensing and Long-term Contracts:
IFRS 15 provides detailed guidance on how to handle licensing arrangements, as well as long-term contracts, such as construction contracts, where revenue can be recognized over time if certain criteria are met.
7.Disclosures:
Entities are required to provide extensive disclosures about revenue, including information about the nature of the revenue, timing of satisfaction of performance obligations, significant judgments made, and the transaction price allocated to remaining performance obligations.
In short, IFRS 15 establishes a comprehensive framework for recognizing revenue from contracts with customers, emphasizing the transfer of control rather than the transfer of risks and rewards. The five-step model ensures that revenue is recognized in a way that reflects the timing and amount of the consideration the entity expects to receive, providing more transparency and consistency in financial reporting.