Every company must follow the five-step model in order to comply with IFRS 15. Well not go into
details, just let me brief you a bit:
IFRS 15 defines a contract as an agreement between two or more parties that creates
enforceable rights and obligations and sets out the criteria for every contract that must be met.
Step 2: Identify the performance obligations in the contract.
The transaction price is the amount of consideration (for example, payment) 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.
Step 4: Allocate the transaction price to the performance obligations in the contract.
For a contract that has more than one performance obligation, an entity should allocate the
transaction price to each performance obligation in an amount that depicts the amount of
consideration to which the entity expects to be entitled in exchange for satisfying each
performance obligation.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
Contract is the agreement between the buyer (customer) and the seller (company)
to conduct a business transaction
Performance obligation is a promise in the contract for the company to transfer a
pre-agreed amount of goods or services to the customer on an agreed time
subjected the intended quality requirements.
All the above criteria should be met in order to record the revenue under IFRS 15. If either
of these requirements is not met, the contract should be further evaluated and should be
amended to reflect a proper business transaction from which income would be received.
IAS 18 provides accounting guidelines to record revenue generated from the following
activities.
Sale of Goods
Revenue arising from selling goods is considered here; thus, this type of revenue is
recognized by manufacturing organizations. In addition to the economic benefit and fair
value criteria, all the risks and rewards of the goods have to be transferred to the buyer
where the seller exerts no further control over the goods sold.
Performing a Service
A service contract can be a lengthy one where it may be delivered within a number of
years. Thus, the stage of completion should be able to be valued reliably and the
proportion of costs incurred for that specific accounting period has to be recognized.
IAS 18 contains principles for revenue recognition, but they are quite broad and as a result,
many companies use their judgment to apply them to their specific situation. This is one of the
main reasons for IAS 18 to be replaced by IFRS 15.