IFRS 15 is the accounting standard that tells companies how and when to recognize revenue. It helps ensure that revenue is reported in a clear, consistent, and comparable way across different businesses and industries.
In simple terms, IFRS 15 answers one big question:
"When should a company recognize revenue, and how much should it recognize?"
Before IFRS 15, companies followed many different rules for different industries (e.g., construction, software, etc.), which caused confusion and inconsistency. IFRS 15 replaces all of those with one single framework that applies to all businesses and all contracts with customers.
The goal is to reflect the actual economic activity: revenue is recognized when control of goods or services is transferred to the customer—not just when money is received or costs are incurred.
The standard is based on a simple but powerful 5-step model for recognizing revenue:
🔹 Step 1: Identify the contract with a customer
A contract is an agreement between two or more parties that creates enforceable rights and obligations.
To apply IFRS 15, the contract must:
Be approved by all parties.
Include clear payment terms.
Have commercial substance (i.e., it’s a real transaction, not just on paper).
Be probable that the company will collect payment.
Example: If a customer agrees to buy a software subscription and signs a contract, this counts as a contract.
🔹 Step 2: Identify the performance obligations
A performance obligation is a promise to deliver a good or service to the customer. A contract can have one or multiple obligations.
Example: If a company sells a smartphone with a 1-year warranty and free setup service, it may have:
A performance obligation to deliver the phone.
Another one for the setup.
And possibly another for the warranty, if it’s a separate service.
🔹 Step 3: Determine the transaction price
The transaction price is the amount of money the company expects to receive for fulfilling its obligations.
This step includes considering:
Discounts
Variable payments (like bonuses or penalties)
Non-cash items (e.g., products exchanged)
Time value of money (if payment is delayed)
Example: If the sticker price is $100 but the customer gets a 10% discount, the transaction price is $90.
🔹 Step 4: Allocate the transaction price to performance obligations
If there are multiple performance obligations, the total transaction price must be divided among them based on their relative standalone prices.
Example: In the phone example, if the phone is normally sold for $800, the warranty for $100, and the setup for $100, then out of a $900 deal, $800 goes to the phone, and $100 to the services.
🔹 Step 5: Recognize revenue when (or as) the performance obligation is satisfied
Revenue is recognized when control of the good or service passes to the customer—either at a point in time or over time.
Point in time: Like selling a physical product in a store.
Over time: Like providing cleaning services every month for a year.
Example:
If a customer buys a book, revenue is recognized when the book is delivered.
If they subscribe to a service, revenue is spread out over the life of the subscription.
Consistency – All companies follow the same process, making financial statements easier to compare.
Transparency – Investors and stakeholders get a clearer picture of how a company earns its money.
Better insights – It helps companies understand the timing and risk involved in their revenue streams.
Some industries had to make major changes in how they recognize revenue:
Software & Technology: where contracts often bundle multiple services.
Telecommunications: for example, phone + subscription bundle plans.
Construction: determining revenue over time is now more precise.
Let’s say a company sells an online course platform. A customer pays €120 for:
Access to the course (worth €100)
1-on-1 support (worth €20)
The company should allocate €100 to course access and €20 to support. If course access is delivered upfront and support is given over 3 months, then:
€100 revenue is recognized immediately
€20 is recognized over the 3-month support period
Contract Modifications: If a customer changes their contract (adds or removes items), the company must reassess performance obligations and transaction price.
Variable Consideration: If the price can change (e.g., performance bonuses, refunds), the company must estimate the most likely amount and adjust revenue accordingly.
Licensing Revenue: If a company licenses software or intellectual property, the revenue recognition depends on whether the license is for use at a point in time or over time.
IFRS 15 applies to all contracts with customers.
It ensures that revenue is recognized when goods or services are transferred, not just when payment is received.
The 5-step model is used to guide the entire revenue recognition process.
It promotes consistency, transparency, and comparability in financial reporting.