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What Is Revenue Recognition Under IFRS 15?

IFRS 15 sets out a single, principle-based framework for recognizing revenue from contracts with customers. Instead of industry-specific rules, all companies apply the same five-step model to determine how much revenue to recognize and when.

Short answer

Under IFRS 15, revenue is recognized when (or as) a company transfers control of promised goods or services to a customer, in an amount that reflects the consideration the company expects to be entitled to, following a five-step model.

IFRS 15 Five-Step Revenue Recognition Model

1
Identify the contract
Confirm there's an agreement with commercial substance and enforceable rights and obligations.
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2
Identify performance obligations
Determine the distinct goods or services promised to the customer.
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3
Determine the transaction price
Estimate the total consideration expected, including variable consideration.
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4
Allocate the transaction price
Split the price across performance obligations based on standalone selling prices.
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5
Recognize revenue
Record revenue when (point in time) or as (over time) control transfers to the customer.

Try it: interactive calculator

Price allocated to Obligation 1

80,000$

= 120,000*(80,000/(80,000+40,000))

Total transaction price120,000 $Standalone price — Obligation 180,000 $Standalone price — Obligation 240,000 $

Step-by-step worked examples

A software company sells a bundle of a license ($80,000 standalone) and one year of support ($40,000 standalone) for a total price of $120,000. Allocate the price to each obligation.

Total standalone = $80,000 + $40,000 = $120,000
License allocation = $120,000 × ($80,000/$120,000) = $80,000
Support allocation = $120,000 × ($40,000/$120,000) = $40,000

A construction company has a $2,000,000 contract to build a custom warehouse, transferring control over time as work progresses. At year-end, 40% of the work is complete. How much revenue should be recognized?

Revenue recognized = $2,000,000 × 40% = $800,000 (over-time recognition based on percentage of completion)

A retailer sells a product for $1,000 with a right of return. Based on history, 5% of similar sales are returned. How much revenue should be recognized at the point of sale?

Expected returns = $1,000 × 5% = $50
Revenue recognized = $1,000 − $50 = $950 (a $50 refund liability is also recorded)

Flashcards

Quick quiz

Q1.A bundle includes Item A (standalone $60,000) and Item B (standalone $20,000), sold together for $80,000. How much is allocated to Item A?

Correct answer: A. $80,000 × ($60,000/$80,000) = $60,000.

Q2.Revenue is recognized 'over time' when:

Correct answer: B. Over-time recognition applies when the customer consumes benefits as the seller performs, among other criteria.

Q3.What is the first step of the IFRS 15 model?

Correct answer: C. The model begins by identifying the contract.

Q4.A retailer expects 5% of $1,000 in sales to be returned. What revenue is recognized?

Correct answer: B. $1,000 − ($1,000 × 5%) = $950, with the $50 recorded as a refund liability.

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Common mistakes

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Recognizing the full contract price as revenue at signing. — Correct: Revenue is recognized as control transfers, which may be over time or at delivery/acceptance — not necessarily at signing.

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Allocating price equally across all performance obligations. — Correct: Allocation follows relative standalone selling prices, not an equal split.

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Ignoring expected returns or refunds when recognizing revenue. — Correct: Variable consideration like expected returns must reduce recognized revenue and be recorded as a liability.

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Treating every deliverable in a contract as one performance obligation. — Correct: Each distinct good or service that the customer can benefit from on its own is a separate performance obligation.

FAQ

What is revenue recognition under IFRS 15?

It's the principle that revenue is recognized when control of promised goods or services transfers to the customer, following a unified five-step model.

What is the IFRS 15 revenue recognition formula?

Allocated Price = Total Transaction Price × (Standalone Price of an Obligation ÷ Sum of All Standalone Prices).

What are examples of IFRS 15 revenue recognition?

Allocating a software license-plus-support bundle by standalone price, and recognizing construction revenue over time based on percentage of completion, are both IFRS 15 applications.

How do you calculate revenue recognition under IFRS 15?

Follow the five-step model: identify the contract, identify performance obligations, determine the transaction price, allocate it by standalone selling price, then recognize revenue as control transfers.