IFRS 15-Revenue Recognition

 

IFRS 15-Revenue Recognition

Revenue is defined as total amount of income generated by sales of goods and services related to the primary operation of business. Basically, any revenue which a company generates through the selling of a good or a product is considered revenue.
All revenue is considered income, but not all types of income are revenue. For e.g., Interest earned .It is recognized as and when it is earned rather than payment is received. It is an accrual accounting not the cash accounting.

It was earlier under IND-AS 9, but as now IFRS is used so this is termed as IFRS 15.

IFRS 15 is applicable for annual reporting periods beginning on or after 1^st January 2018.

The main objective is to establish the principles that an organization shall apply to report useful information to users of financial statements which is external or internal about the nature, amount, timing and uncertainty of revenue and cash flows arising from contract.

Main Steps required for revenue recognition are:

Step	Description
1.	Identify the Contract: Determine if a legally enforceable contract exists between the company and the customer. The contract should specify the goods or services to be provided and the terms of payment.
2.	Identify the Performance Obligations: Identify the distinct goods or services that are promised to the customer within the contract. Performance obligations can be separate or bundled together.
3.	Determine the Transaction Price: Determine the amount of consideration (payment) the company expects to receive in exchange for fulfilling its performance obligations. This may involve variable consideration, discounts, or other adjustments.
4.	Allocate the Transaction Price: Allocate the total transaction price to each performance obligation based on its relative standalone selling price. If standalone prices are not directly observable, estimation methods may be used.
5.	Recognize Revenue as Performance Obligations are Satisfied: Recognize revenue when the company satisfies each performance obligation by transferring control of the promised goods or services to the customer. This may occur over time or at a specific point in time, depending on the nature of the performance obligation.
6.	Recognize Revenue Over Time: If revenue is recognized over time, measure progress toward satisfying the performance obligation and recognize revenue accordingly. This often involves using a method like the percentage of completion or input method.
7.	Recognize Revenue at a Point in Time: If revenue is recognized at a specific point in time, revenue is recognized when control of the goods or services is transferred to the customer, typically upon delivery or when the customer takes possession.
8.	Consider Other Factors: Consider any other factors that may affect revenue recognition, such as warranties, returns, and collectability of payment. Adjust revenue as necessary to account for these factors.
9.	Disclosures: Provide adequate disclosures in the financial statements regarding the company's revenue recognition policies, significant judgments, and any changes in those policies.

Advantages:

·       One of the global revenue recognition standards:

      The International Financial Reporting Standards (IFRS) is emerging around the world, and it is now the main accounting standard used in 119 countries.  The main task of IFRS-15 is to the goal of sharing a common global accounting standard to improve global investment and borrowing, and to make greater efficiency for global organizations.
The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) are collaborated to develop a compatible set of accounting standards to make everyone easy.

·        Helps to building up budgeting & planning:
The main motto of the financial statements is to report historical financial data. IFRS 15 have play crucial role in this regard. The IFRS-15 helps to forecasts that can enable stronger revenue and cash flow budgeting.
The IFRS-15 would benefit company planning and performance management because the new revenue standards require detailed tracking of the progress of contracts. Ex-this information useful to stockholders. However, the disclosure requirements provide information to insider and outsiders of the entity which can enable the users of the financial statements to understand the nature, amount, timing, and uncertainty of revenues and cash flows related to contracts with customers.

 Will come soon with another detailed IFRS.