IFRS 15: Revenue from Contracts with Customers

Comprehensive vocabulary flashcards covering the core principles, five-step model, presentation, contract costs, and special transaction types of IFRS 15 (Revenue from Contracts with Customers).

Objective of IFRS 15

To establish the principles for reporting useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer.

Five-Step Model

The revenue recognition framework in IFRS 15 consisting of: Step 1: Identify the Contract with Customers; Step 2: Identify the Performance Obligation(s) in the Contract; Step 3: Determine the Transaction Price; Step 4: Allocate the Transaction Price to each Performance Obligation; Step 5: Recognize Revenue when (or as) Performance Obligations are satisfied.

Contract

An agreement between two or more parties that creates enforceable rights and obligations, which may be written, oral, or implied by an entity's customary business practices.

Combination of Contracts

The requirement to combine two or more contracts entered into at or near the same time with the same customer (or related parties) and account for them as a single contract if negotiated as a package with a single commercial objective, if consideration in one depends on the price/performance of the other, or if promised goods/services form a single performance obligation.

Commercial Substance

A contract criterion under IFRS 15 requiring that the risk, timing, or amount of the entity's future cash flows is expected to change as a result of the contract.

Contract Criteria Not Met (Accounting)

Consideration received from a customer must be recognized as a liability until criteria are met, or recognized as revenue only when performance is complete and substantially all non-refundable consideration is collected, or when the contract is terminated and consideration received is non-refundable.

Performance Obligation

A promise in a contract with a customer to transfer either a good or service (or bundle) that is distinct, or a series of distinct goods or services that are substantially the same and have the same pattern of transfer.

Distinct Goods or Services

A good or service that meets two criteria: the customer can benefit from it either on its own or together with readily available resources, and the entity's promise to transfer it is separately identifiable from other promises in the contract.

Contract Liability

An entity's obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due) from the customer.

Contract Asset

An entity's right to consideration in exchange for goods or services transferred to a customer when that right is conditioned on something other than the passage of time (such as future performance).

Contract Receivable

An entity's right to consideration that is unconditional, where only the passage of time is required before payment is due.

Incremental Costs of Obtaining a Contract

Costs incurred to obtain a contract that would not have been incurred if the contract had not been obtained (e.g., sales commission), recognized as an asset if they are expected to be recovered.

Practical Expedient for Incremental Costs

Allows incremental costs of obtaining a contract to be expensed as incurred if the amortization period of the contract is one year or less.

Costs to Fulfil a Contract

Costs outside the scope of other standards (like IAS 2, IAS 16, IAS 38) that must be recognized as an asset if they relate directly to a contract, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered.

Transaction Price

The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.

Expected Value Method

An estimation method for variable consideration based on the probability-weighted sum of amounts within a range, appropriate when an entity has a large number of contracts with similar characteristics.

Single Most Likely Amount

An estimation method for variable consideration based on the single amount within a range that is most likely to eventuate, appropriate when a contract has few amounts or only two possible outcomes.

Variable Consideration Constraint

The rule requiring variable consideration to be included in the transaction price only to the extent that it is highly probable that a significant reversal in cumulative revenue recognized will not occur when the uncertainty is subsequently resolved.

Refund Liability

A liability recognized instead of revenue for consideration received (or receivable) to which the vendor does not expect to be entitled because the related goods are expected to be returned.

Settlement Discount

An early payment discount where revenue is recorded net of discount if the customer is expected to pay early, or recorded at the full amount if the customer is not expected to pay early.

Significant Financing Component

An adjustment made to the transaction price when the timing of payments agreed by the parties provides either the customer or the entity with a significant benefit of financing the transfer of goods or services.

Practical Expedient for Significant Financing Component

An entity need not adjust promised consideration for a financing component if the period between product/service transfer and payment is expected to be one year or less at contract inception.

Non-Cash Consideration

Consideration in a form other than cash, measured at fair value; if fair value is not reliably determinable, it is measured at the stand-alone selling price of the promised goods or services.

Consideration Payable to a Customer

Cash amounts or credit items (such as coupons or vouchers) paid or expected to be paid to a customer, accounted for as a reduction of the transaction price and revenue unless paid for a distinct good or service at fair value.

Stand-Alone Selling Price

The price at which an entity would sell a promised good or service separately to a customer under similar circumstances and to similar customers, determined at contract inception.

Market Assessment Approach

A method to estimate stand-alone selling price by evaluating the market in which goods or services are sold and estimating the price customers would pay, referring to competitor prices adjusted for entity-specific costs and margins.

Expected Cost Plus Markup / Margin

A method to estimate stand-alone selling price by forecasting expected costs of satisfying a performance obligation and adjusting with an appropriate markup or margin.

Residual Approach

A method to estimate stand-alone selling price by subtracting the sum of observable stand-alone selling prices of other promised goods or services from the total contract transaction price, used only when selling price is highly variable or uncertain.

Allocation of Discounts

The proportional allocation of a discount to all performance obligations based on relative stand-alone selling prices, unless observable evidence indicates the discount relates to specific performance obligations.

Performance Obligation Satisfied Over Time

Revenue is recognized over time if the customer simultaneously receives and consumes benefits, the entity creates/enhances a customer-controlled asset, or the asset has no alternative use and the entity has an enforceable right to payment for performance completed to date.

Output Methods

Methods to measure progress of over-time revenue recognition based on direct value transferred to the customer, such as surveys of performance completed, milestones reached, or units delivered.

Input Methods

Methods to measure progress of over-time revenue recognition based on the entity's efforts or inputs, such as resources consumed, labour or machine hours, costs incurred, or time lapsed.

Contract Modification

A change in the scope or price (or both) of a contract approved by the parties, accounted for as a separate contract, a termination of the old and creation of a new contract, or a cumulative catch-up adjustment.

Material Right

A customer option to acquire additional goods or services (e.g., loyalty points, discounts) that provides a benefit the customer would not receive without entering into the contract, accounted for as a separate performance obligation.

Principal

An entity that controls the promised good or service before it is transferred to the customer, recognizing revenue in the gross amount of consideration received.

Agent

An entity whose performance obligation is to arrange for the provision of goods or services by another party, recognizing revenue only in the amount of the net fee or commission entitled.

Right to Access (Licensing)

A license where the customer accesses intellectual property as it exists throughout the license period, satisfied over time because the entity can make changes that affect the customer without transferring additional goods/services.

Right to Use (Licensing)

A license where the customer receives a right to use intellectual property as it exists at the point in time the license is granted, satisfied at a point in time.

Sales-Based or Usage-Based Royalties

Consideration for a license of intellectual property where revenue is recognized only when (or as) the subsequent sale/usage occurs, and the related performance obligation has been satisfied.

Assurance Type Warranty

A warranty providing customer assurance that a product will function as specified (cannot be purchased separately), which is accounted for as a provision under IAS 37.

Service Type Warranty

A warranty providing a service in addition to assurance that the product functions as specified (can be purchased separately), accounted for as a separate performance obligation with allocated transaction price.

Bill-and-Hold Arrangement

A contract where an entity bills a customer for a product but retains physical possession until transfer at a point in the future, requiring four criteria to recognize revenue: substantive reason, separate identification, readiness for transfer, and entity inability to use or redirect the product.

Consignment Arrangement

An arrangement where goods are delivered to a dealer/distributor but controlled by the entity until a specified event occurs (such as a resale), meaning revenue is not recognized upon initial delivery.

Repurchase Agreement

A contract where an entity sells an asset and promises, or has the option, to repurchase it, taking the form of a forward contract, call option, or put option, and accounted for as a lease, a financing arrangement, or a sale with right of return.

Non-refundable Upfront Fees

Fees charged at or near contract inception (e.g., joining or activation fees); if related to a promised good/service, revenue is recognized under IFRS 15, but if related to administrative setup tasks, it is treated as an advance payment for future goods/services.