IFRS 15 – Revenue Recognition

IFRS 15 – Revenue Recognition
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On 28th May 2014, the IASB issued a new standard known as IFRS-15, Revenue Recognition to replace the existing IAS 18 and IAS 11. The rule was expected to be effective as of the financial year beginning from 1st January 2018. The new model was supposed to bring a substantial change in accounting for long-term contracts. The introduction of the new standard was based on the following reasons. Revenue is a crucial financial aspect of a company, and therefore a control-based approach is vital in its recognition. To determine the satisfaction of a performance obligation when the control of an asset or service is transferred from the producer to the customer. A performance obligation is satisfied when the customer gains control of the asset or has consumed the service, and the entity loses its transfer obligation.
The primary requirement of IFRS 15 is that a business should recognize revenue with a value that portrays the transfer of control of goods or services from the firm to the customer. The value should be equal to the expected consideration that the entity will gain from the customer during the transfer. To ensure the achievement of this core principle, the concerned company will observe the following five steps of the framework. The first step is to identify the agreement(s) with a customer. The next step, determine the performance obligations in the contract. The third step involves estimating and deciding on the transaction price. Next is the allocation of the transactional cost to each performance obligation relating to the agreement. The final step is to realize the revenue when the firm fulfills a performance obligation or as it meets each performance obligation. These steps can be discussed broadly, as shown below.
The first step for an entity to take is to spot the commitment(s) with the buyer. This can be a written, oral, or implied agreement. This step is complete under the following conditions. All the parties to the transaction should approve the deal as complete, usually by signing. The right of each party concerning the transfer of the products or services should be identifiable in the contract. The terms of payment involved in the transfer of the goods and services should be recognizable. The transaction involved in the deal should have a substantial impact on the future cash flows of the business. Lastly, there should be a possibility of collecting consideration from the customer. The consideration is usually the amount entitled to the entity accruing from the exchange of goods and services.
The next step is to identify the performance obligations that exist in the deal. A performance obligation is what the entity promises to transfer to the customer during the contract. The promise can be goods or services that are distinct. It can also include a series of different assets or services that have the same value and form of transfer from the entity to the customer. The criteria for identifying a distinct good or service involves meeting the following conditions. The customer should be able to gain satisfaction from the consumption of the product either on its own or in combination with other resource...