What you need to know first
- Revenue is recognized when control of a promised good or service transfers to the customer—either at a point in time or over time.
- Bundled contracts (such as software + implementation + annual support) must be split into distinct performance obligations before recognizing revenue.
- Discounts, rebates, penalties, and milestone bonuses must be estimated upfront as variable consideration—only to the extent a reversal is highly improbable.
1. Why IFRS 15 Matters in Practice
In many businesses, invoicing schedules and cash collection do not match the legal or economic transfer of goods and services. IFRS 15 replaces older separate rules for goods, services, and construction contracts with a single five-step model focused on when control passes to the customer.
- Step 1: Identify the contract(s) with a customer.
- Step 2: Identify the separate performance obligations in the contract.
- Step 3: Determine the overall transaction price.
- Step 4: Allocate the transaction price to each performance obligation based on standalone selling prices.
- Step 5: Recognize revenue when (or as) each performance obligation is satisfied.
2. Point in Time vs. Over Time Recognition
You do not default to point-in-time recognition simply because a final deliverable exists. Revenue is recognized over time if any one of three criteria is met:
- The customer simultaneously receives and consumes the benefit as you perform (e.g., monthly payroll processing or retainer advisory).
- Your performance creates or enhances an asset that the customer controls as it is created (e.g., building on customer-owned land).
- Your work does not create an asset with an alternative use to you, and you have an enforceable right to payment for performance completed to date.
Worked Example: A technology firm signs a Rs 6,000,000 contract covering an on-premise license (standalone value Rs 4,000,000) and 12 months of post-go-live maintenance (standalone value Rs 2,000,000). Even if billed upfront, Rs 4,000,000 is recognized upon license delivery and Rs 2,000,000 is recognized evenly over the 12-month support period.
3. Common Audit Adjustments to Watch For
During statutory audits, the most frequent IFRS 15 findings involve unrecorded contract liabilities (deferred revenue), upfront setup fees recognized immediately without transferring a distinct service, and principal-versus-agent misclassifications.