Objectives

The main objectives of IFRS 15 are to establish principles that an entity should apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer. Here are the key objectives explained:

1. Identify the Contract with a Customer: The first objective is to determine whether a contract exists between the entity and the customer. For example, a software company signs a contract with a customer to provide a cloud-based software solution for a period of two years in exchange for monthly payments.

2. Identify Performance Obligations: IFRS 15 requires an entity to identify the distinct performance obligations within a contract. For example, a construction company enters into a contract to build a house for a customer, which includes both construction services and the sale of building materials. These would be considered separate performance obligations.

3. Determine the Transaction Price: The next objective is to determine the transaction price, which is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services. For example, a consulting firm agrees to provide services to a client for a fixed fee of $10,000.

4. Allocate the Transaction Price: IFRS 15 specifies that the transaction price should be allocated to each distinct performance obligation based on their stand-alone selling prices. For example, if a company sells a product and offers a warranty separately, the transaction price should be allocated between the two elements.

5. Recognize Revenue When or As Performance Obligations Are Satisfied: The final objective is to recognize revenue as the entity satisfies performance obligations by transferring control of promised goods or services to the customer. This could be over time or at a point in time, depending on the terms of the contract.

These objectives help companies apply the core principle of IFRS 15, which is to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Scope

When IFRS 15 is applied in a business context, its scope applies to all contracts with customers, except for certain specific exceptions. Here are some key aspects of the scope of IFRS 15 with examples:

1. Contract with a Customer: IFRS 15 applies to contracts with customers that are legally enforceable and have commercial substance. For example, a software company selling licenses to customers would fall within the scope of IFRS 15.

2. Sale of Goods or Services: The standard applies to contracts that involve the sale of goods, provision of services, or a combination of both. For instance, a telecommunications company offering a bundled package of services including internet, TV, and phone services would be within the scope.

3. Performance Obligations: IFRS 15 covers contracts that contain performance obligations, which are promises to transfer goods or services to a customer. An example could be a construction company entering into a contract to build a commercial building for a client.

4. Determination of Transaction Price: The standard applies to contracts where the transaction price can be estimated reliably. This includes variable consideration such as discounts, rebates, refunds, or bonuses based on customer behavior.

5. Commercial Substance: IFRS 15 requires contracts to have commercial substance, meaning the parties to the contract are expected to change their future cash flows as a result of the contract. This excludes contracts such as donations or certain financial instruments.

6. Non-Monetary Consideration: The standard covers contracts with non-monetary consideration, where goods or services are received in exchange for promises to pay, equity instruments, or other non-cash consideration.