IFRS 15: Revenue in depth
The five-step model in detail: performance obligations, variable consideration, allocation and revenue over time.
ACCA exams this helps with: FR Financial Reporting SBR Strategic Business Reporting See the ACCA map
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What it is: IFRS 15 is the standard that decides when a business counts a sale as revenue, and how much to count.
Why you need it: For a shop it is simple: revenue is counted when the customer takes the goods. It is harder when one contract includes several things, when the price can change, or when the work takes months.
What you do (5 steps): 1. Find the contract. 2. List the separate things promised. 3. Find the price. 4. Share the price between the separate things. 5. Count revenue when (or as) each thing is delivered.
Example. A gym member pays £600 on 1 January for 12 months. The gym delivers the service every month. Revenue each month = £600 ÷ 12 = £50. It is not £600 on day one.
Key words
- Performance obligation
- A promise in a contract to give the customer a separate good or service. Revenue is recognised as each promise is completed.Example: A contract for a phone and 12 months of airtime has two performance obligations.
- Transaction price
- The total amount a business expects to receive under a contract with a customer.Example: A contract for a machine, installation and service for £90,000 has a transaction price of £90,000.
- Standalone selling price
- The price at which a business would sell a good or service on its own, to a separate customer.Example: A phone sold on its own for £400 has a standalone selling price of £400.
- Variable consideration
- Any part of a contract price that depends on something happening in future, such as a bonus, a penalty or a discount.Example: A £20,000 bonus paid only if the project finishes early.
- Contract liability
- Money a customer has paid before the business has done the work or delivered the goods. It is a liability until the work is done.Example: A member pays £600 in January for a year. After one month, £550 is still a contract liability.
Learn
IFRS 15 uses 5 steps to decide when to count revenue and how much.
Step 1: Find the contract
A contract exists if all of these are true: both sides have agreed to it, each side’s rights and the payment terms are clear, it has a real business purpose (commercial substance), and the customer will probably pay.
Step 2: List the separate promises (performance obligations)
Each distinct good or service is a separate promise. It is distinct if both are true: (1) the customer can benefit from it on its own, or with things they can easily get, and (2) it is separate from the other promises in the contract. Example: An installation that changes the product a lot may not be separate from the product.
Warranties. An assurance-type warranty only promises the product works. It is not a separate promise. A service-type warranty is extra cover the customer can buy. It is a separate promise.
Step 3: Find the price (transaction price)
- Some of the price may change, for example a bonus, a penalty or a discount. This is variable consideration. Estimate it using either the expected value (each possible amount × its probability, added up) or the most likely amount. Use whichever gives the better estimate.
- Only include it if it is highly unlikely that a large amount will have to be reversed later. This is called the constraint.
- If the customer pays a long time after delivery, adjust the price for the interest included (a financing component).
Step 4: Share the price between the promises
Share it in proportion to each promise’s standalone selling price: the price it would sell for on its own.
Example: A phone and a 12-month plan are sold together for £640. On their own, the phone sells for £500 and the plan for £300 (£800 in total). Phone = £640 × 500/800 = £400. Plan = £640 × 300/800 = £240, which is £20 a month.
If an item is never sold on its own, estimate its price. Methods: look at what the market pays, or use expected cost plus a profit margin. In limited cases, use what is left over (the residual approach).
Step 5: Count the revenue
Count revenue over time if any one of these is true:
- The customer gets the benefit while the work is being done (for example, cleaning or payroll services).
- The work creates or improves an asset the customer controls (for example, building on the customer’s land).
- The seller cannot use the asset for anyone else, and has a right to be paid for the work done so far.
If none is true, count the revenue at one point in time: when the customer gets control. For work done over time, progress is often measured as costs so far ÷ total expected costs.
Contract balances
Cash received before the work is done is a contract liability. Work done before the customer is billed is a contract asset.
Watch it explained
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Videos from YouTube tutors
These videos are made by independent tutors on YouTube, not by Trial Balance. Some use US terms or older exam names (for example F7 for FR), but the principles are the same.
Worked example
A software company sells a licence, installation and two years of support together for £90,000. Sold separately, they would cost £60,000, £10,000 and £30,000.
| Obligation | Standalone price £ | Allocation | Revenue £ | When recognised |
|---|---|---|---|---|
| Licence | 60,000 | 90,000 × 60/100 | 54,000 | On delivery |
| Installation | 10,000 | 90,000 × 10/100 | 9,000 | When installation is complete |
| Support | 30,000 | 90,000 × 30/100 | 27,000 | Evenly over 2 years (£13,500 a year) |
| Total | 100,000 | 90,000 |
If the customer pays the full £90,000 on day one, the support revenue not yet earned is shown as a contract liability and released as the support is provided.
Practice questions
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