IFRS 15, also known as “Revenue from Contracts with Customers”, is one of the most relevant international standards for companies seeking to comply with global accounting standards. This standard was issued by the International Accounting Standards Board (IASB) to unify and standardize revenue recognition, replacing the old IAS 11 and IAS 18 standards. Its implementation has changed the way organizations record revenue, improving comparability and transparency in financial statements.
What is IFRS 15 and what is its purpose?
IFRS 15 establishes a clear framework for the identification, measurement and recognition of revenue from contracts with customers. Its main objective is to ensure that financial statements accurately reflect:
- The nature of the revenue generated.
- The amount of revenue.
- The timing of revenue generation.
- Certainty about the associated cash flows.
This standard is applicable to almost all entities, regardless of their industry, and seeks to eliminate inconsistencies in the way revenue was previously recognized.
Five-step revenue recognition model
IFRS 15 introduces a structured five-step model to ensure proper revenue recognition. Each of these is explained below:
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Identification of the contract with the customer
The first step is to determine whether there is a valid contract that creates enforceable rights and obligations between the parties. The contract must meet criteria such as:
- Approval by both parties.
- Clear identification of the parties’ rights.
- Likelihood of the company receiving consideration.
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Identification of performance obligations
This step consists of identifying the promises of goods or services that will be delivered to the customer. Each distinct promise is considered a performance obligation, which means that:
- An assessment is made of whether the goods or services are differentiable within the contract.
- The obligations that must be fulfilled before the recognition of the income are determined.
- A check is made to see if there is a dependency relationship between the performance obligations.
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Determining the transaction price
The transaction price is the amount that the company expects to receive in exchange for fulfilling its performance obligations. This includes:
- Fixed consideration: Payments defined in the contract.
- Variable consideration: Bonuses, discounts, refunds or conditional incentives.
- Effects of the time value of money: If the contract involves deferred payments, the impact of the present value must be considered.
- Non-monetary remuneration: In case the payments include goods or services instead of cash.
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Allocation of the transaction price
Once the price has been determined, it is allocated to each performance obligation based on the stand-alone selling prices of the promised goods or services. This step involves:
- Use of reference prices or estimates.
- Application of proportionate allocation methods.
- Consideration of incentive-based adjustments or discounts.
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Recognition of revenue
Revenue is recognized when (or as) the entity satisfies a performance obligation, that is, when control of the good or service is transferred to the customer. This can be:
- At a specific point in time: As in the sale of physical goods.
- Over time: In service contracts or construction projects.
Main industries impacted by IFRS 15
The implementation of IFRS 15 has had a significant impact on various industries, especially those with complex contracts or variable income. Some of the most affected are:
- Construction: Due to long-term contracts and the need to assess progress towards meeting performance obligations, companies have had to modify the way they recognize revenue from projects in progress.
- Technology and software: Many companies offer software packages, licenses, and cloud services in a single contract, requiring detailed allocation of revenue by component.
- Telecommunications: The combination of mobile devices and services in a single plan requires precise disaggregation of revenue.
- Manufacturing industry: In the case of phased deliveries or with maintenance agreements, it is crucial to determine the exact moment when the performance obligation is met.
Benefits of implementing IFRS 15
IFRS 15 brings multiple benefits to companies and users of financial statements. Firstly, it improves the transparency of accounting information, allowing stakeholders to understand a company’s income and profitability more clearly. This standardized accounting framework also promotes international comparability, making it easier for companies in different countries to present their income information in a uniform manner, reducing discrepancies in the interpretation of financial statements.
Another key aspect is the greater financial control and forecasting provided by IFRS 15. By defining a structured model for revenue recognition, companies can manage and forecast their revenues more accurately, which improves strategic planning. The standard also helps to reduce subjectivity in revenue accounting, as it establishes clear rules that minimize the possibility of arbitrary or inconsistent interpretations.
Finally, the implementation of IFRS 15 strengthens the confidence of investors and regulators, improving the credibility of financial information and favoring decision-making based on accurate and verifiable data.
Challenges in implementing IFRS 15
The implementation of IFRS 15 presents several challenges for companies. One of them is the reassessment of contracts, as it is necessary to review existing agreements to comply with the new revenue recognition criteria. In addition, accounting personnel must be trained to adapt to the new procedures and, in many cases, accounting systems must be modified to comply with the standard.
Another challenge is the increased administrative burden, as more detailed documentation of revenues and contracts is required. This implies a greater effort in data collection and maintenance to ensure accuracy and compliance with disclosure requirements.
Conclusion
IFRS 15 is a fundamental standard that redefines the way in which companies recognize income, improving clarity and confidence in financial information. Its implementation requires effort and adaptation, but the benefits outweigh the challenges. If your organization has not yet adopted this standard or is looking to optimize its application, it is essential to seek specialized advice to ensure compliance with international standards.