IFRS 15 Revenue from Contracts with Customers decides when an entity recognises revenue and at what amount. Its objective is to establish the principles an entity applies to report useful information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer (IFRS 15.1). The core principle: recognise revenue 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 (IFRS 15.2).
It applies to all contracts with customers except lease contracts within the scope of IFRS 16, contracts within the scope of IFRS 17 Insurance Contracts, financial instruments within the scope of IFRS 9 and the consolidation and investment Standards, and certain non-monetary exchanges between entities in the same line of business (IFRS 15.5).
The five-step model
| Step | What it involves | Reference |
|---|---|---|
| 1. Identify the contract | A contract with a customer that meets five criteria | (IFRS 15.9) |
| 2. Identify the performance obligations | Each promise to transfer a distinct good or service, or a series of substantially the same ones | (IFRS 15.22) |
| 3. Determine the transaction price | The consideration the entity expects to be entitled to, excluding amounts collected on behalf of third parties | (IFRS 15.47) |
| 4. Allocate the transaction price | To the performance obligations, on a relative stand-alone selling price basis | (IFRS 15.74) |
| 5. Recognise revenue | When (or as) a performance obligation is satisfied — when the customer obtains control | (IFRS 15.31) |
Step 1: Identify the contract with the customer
A contract is an agreement between two or more parties that creates enforceable rights and obligations (IFRS 15, Appendix A). An entity accounts for it under the Standard only when all five criteria are met (IFRS 15.9):
- The parties have approved it — in writing, orally or under customary business practices — and are committed to perform.
- Each party's rights regarding the goods or services can be identified.
- The payment terms can be identified.
- The contract has commercial substance.
- Collection of the consideration is probable, considering only the customer's ability and intention to pay when due.
Contract modifications
A modification is a change in the scope or price (or both) of a contract that the parties approve (IFRS 15.18). It is a separate contract if it adds distinct goods or services at a price reflecting their stand-alone selling prices (IFRS 15.20). Otherwise it is treated as a termination of the existing contract and creation of a new one if the remaining goods or services are distinct from those already transferred (IFRS 15.21(a)), or as part of the existing contract, with a cumulative catch-up adjustment to revenue, if they are not distinct and form part of a partially satisfied performance obligation (IFRS 15.21(b)). If the remaining items are a mix of both, the entity accounts for the effects on the unsatisfied obligations consistently with the objectives of paragraph 21 (IFRS 15.21(c)).
Step 2: Identify the performance obligations
At contract inception the entity identifies as a performance obligation each promise to transfer a distinct good or service, or a series of distinct goods or services that are substantially the same and have the same pattern of transfer (IFRS 15.22). A good or service is distinct if the customer can benefit from it on its own or with readily available resources, and the promise to transfer it is separately identifiable from other promises in the contract (IFRS 15.27).
Indicators that promises are not separately identifiable include a significant service of integrating goods and services into a combined output, one item significantly modifying or customising another, and items being highly interdependent or interrelated (IFRS 15.29). The materials and labour in a contract to construct a building are inputs to one output.
Step 3: Determine the transaction price
The transaction price is the consideration the entity expects to be entitled to for transferring the goods or services, excluding amounts collected on behalf of third parties, such as some sales taxes (IFRS 15.47). It reflects variable consideration and its constraint, any significant financing component, non-cash consideration and consideration payable to a customer (IFRS 15.48). The last of these — vouchers, for example — reduces revenue unless it pays for a distinct good or service that the customer transfers to the entity (IFRS 15.70).
Variable consideration and the constraint
Consideration can vary because of discounts, rebates, refunds, incentives, performance bonuses, penalties and similar items, or because of a right of return (IFRS 15.51). The entity estimates it with whichever method better predicts the amount (IFRS 15.53):
- Expected value: the sum of probability-weighted amounts — may suit a large number of similar contracts.
- Most likely amount: may suit a contract with only two possible outcomes, such as a performance bonus that is either achieved or not.
Then the constraint applies: variable consideration is included only to the extent that it is highly probable that a significant reversal of cumulative revenue recognised will not occur when the uncertainty is resolved (IFRS 15.56). Both the likelihood and the magnitude of a reversal matter. One factor that could increase them is consideration that is highly susceptible to factors outside the entity's influence, such as market volatility (IFRS 15.57).
Significant financing component
If the agreed timing of payments gives either party a significant benefit of financing, the consideration is adjusted for the time value of money (IFRS 15.60), so that revenue reflects the cash selling price when the goods or services transfer (IFRS 15.61). The discount rate is the one that would apply in a separate financing transaction between the parties at contract inception, and it is not updated later (IFRS 15.64). The effects of financing are presented as interest revenue or expense, separately from revenue from contracts with customers (IFRS 15.65). No adjustment is needed if the expected period between transfer and payment is one year or less (IFRS 15.63).
Step 4: Allocate the transaction price
The transaction price is allocated so that each performance obligation receives the consideration the entity expects for it (IFRS 15.73), in proportion to the stand-alone selling prices determined at contract inception (IFRS 15.74, 76).
The stand-alone selling price is the price at which the entity would sell the good or service separately. The best evidence is its observable price when sold separately in similar circumstances to similar customers, and a contract or list price is not presumed to be that price (IFRS 15.77). If it is not observable, the entity estimates it, maximising observable inputs (IFRS 15.78). Suitable methods include the adjusted market assessment approach, expected cost plus a margin, and the residual approach — the last only when the selling price is highly variable or not yet established (IFRS 15.79).
If the sum of stand-alone selling prices exceeds the consideration, the difference is a discount allocated proportionately to all performance obligations, unless observable evidence shows that it relates to only some of them (IFRS 15.81).
Step 5: Over time or at a point in time?
Revenue is recognised when (or as) a performance obligation is satisfied — when the customer obtains control of the good or service (IFRS 15.31), meaning the ability to direct its use and obtain substantially all of its remaining benefits (IFRS 15.33). The amount recognised is the part of the transaction price allocated to that obligation (IFRS 15.46).
A performance obligation is satisfied over time if any one of three criteria is met (IFRS 15.35):
| Criterion | Illustration |
|---|---|
| (a) The customer simultaneously receives and consumes the benefits as the entity performs | Routine or recurring services such as cleaning (IFRS 15.B3) |
| (b) The entity's performance creates or enhances an asset that the customer controls as it is created or enhanced | Construction on land the customer owns |
| (c) The performance creates no asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date | An asset built to one customer's specification |
An asset has no alternative use if the entity is restricted contractually, or limited practically, from readily directing it to another use (IFRS 15.36). The right to payment must, at all times, cover at least the performance completed to date if the customer terminates for reasons other than the entity's failure to perform (IFRS 15.37).
Over-time revenue is measured by progress towards complete satisfaction (IFRS 15.39), using output methods such as milestones reached or input methods such as costs incurred (IFRS 15.B15, B18). If the outcome cannot be reasonably measured but the costs are expected to be recovered, revenue is recognised only to the extent of costs incurred (IFRS 15.45).
If none of the criteria is met, the obligation is satisfied at a point in time. Indicators include the entity's present right to payment, the customer's legal title and physical possession, the customer having the significant risks and rewards of ownership, and customer acceptance (IFRS 15.38).
Principal or agent
When another party is involved, the entity decides for each specified good or service whether it promises to provide it itself (principal) or to arrange for the other party to provide it (agent) (IFRS 15.B34). A principal controls the good or service before it is transferred to the customer (IFRS 15.B35) and recognises the gross consideration (IFRS 15.B35B). An agent does not, and recognises its fee or commission (IFRS 15.B36).
Indicators that the entity is a principal include primary responsibility for fulfilling the promise, inventory risk, and discretion in establishing the price (IFRS 15.B37). An online platform that lists suppliers' products, where the suppliers set the prices and bear the risks and the platform takes a percentage of each sale, will often recognise only its commission as revenue.
Contract costs
| Cost | Treatment | Reference |
|---|---|---|
| Incremental costs of obtaining a contract, such as a sales commission | Asset if the entity expects to recover them | (IFRS 15.91–92) |
| Costs of obtaining a contract that would have been incurred even without it | Expense, unless explicitly chargeable to the customer | (IFRS 15.93) |
| Costs to fulfil a contract that are outside other Standards | Asset if they relate directly to an identified contract or anticipated contract, generate resources used to satisfy future performance obligations, and are expected to be recovered | (IFRS 15.95) |
| General and administrative costs not explicitly chargeable to the customer, unpriced wasted resources, costs of past performance, and costs not distinguishable between satisfied and unsatisfied obligations | Expense when incurred | (IFRS 15.98) |
The asset is amortised on a systematic basis consistent with the transfer of the related goods or services (IFRS 15.99). As a practical expedient, incremental costs of obtaining a contract may be expensed if the amortisation period would be one year or less (IFRS 15.94).
Contract assets and contract liabilities
When either party has performed, the entity presents the contract as a contract asset or a contract liability, depending on the relationship between its performance and the customer's payment, and presents unconditional rights to consideration separately as receivables (IFRS 15.105):
| Item | When it arises | Reference |
|---|---|---|
| Contract liability | The customer pays, or payment is due, before the entity transfers the good or service | (IFRS 15.106) |
| Contract asset | The entity transfers the good or service before payment is made or due, and its right is conditional on something other than the passage of time | (IFRS 15.107; Appendix A) |
| Receivable | A right to consideration that only requires the passage of time | (IFRS 15.108) |
Contract assets are assessed for impairment under IFRS 9 (IFRS 15.107). IFRS 9 requires the loss allowance on trade receivables and contract assets without a significant financing component to equal lifetime expected credit losses (IFRS 9.5.5.15), and gives the provision matrix as a practical expedient for trade receivables (IFRS 9.B5.5.35).
Worked example: the five steps
The figures are illustrative. On 1 October 2026 an entity sells a customer a machine plus 12 months of maintenance (to 30 September 2027) for fixed consideration of 120,000. It delivers the machine and collects the cash the same day. Its stand-alone selling prices are 100,000 for the machine and 25,000 for a year's maintenance.
- Contract: meets the five criteria (IFRS 15.9).
- Performance obligations: two — the machine and the maintenance — each distinct (IFRS 15.27).
- Transaction price: 120,000. No financing adjustment, because the prepaid maintenance period is not more than one year (IFRS 15.63).
- Allocation: stand-alone selling prices total 125,000, so the 5,000 discount is allocated proportionately (IFRS 15.81): machine 120,000 × 100,000 ÷ 125,000 = 96,000; maintenance 120,000 × 25,000 ÷ 125,000 = 24,000.
- Recognition: the machine at a point in time, on delivery, when possession and title pass (IFRS 15.38). The maintenance over time, because the customer simultaneously receives and consumes the benefits (IFRS 15.35(a)), on a straight-line basis of 2,000 a month since the entity's efforts are spread evenly (IFRS 15.B18).
| Date and account | Debit | Credit |
|---|---|---|
| 1 October 2026: Cash | 120,000 | |
| Revenue (machine) | 96,000 | |
| Contract liability (maintenance) | 24,000 | |
| 31 December 2026: Contract liability | 6,000 | |
| Revenue (maintenance, 3 months × 2,000) | 6,000 |
Revenue from the contract in 2026 is 102,000, and at 31 December 2026 the statement of financial position shows a contract liability of 18,000, which becomes revenue during 2027 (IFRS 15.106).
From IAS 18 to IFRS 15
- Issue and replacement. The International Accounting Standards Board (IASB) issued IFRS 15 in May 2014, together with the introduction of Topic 606 into the Accounting Standards Codification of the US Financial Accounting Standards Board (FASB). It replaced IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13, IFRIC 15, IFRIC 18 and SIC-31, and provides a comprehensive framework for recognising revenue from contracts with customers.
- Effective date. In September 2015 the mandatory effective date was deferred to 1 January 2018, so IFRS 15 applies to annual reporting periods beginning on or after 1 January 2018, with earlier application permitted.
- Clarifications (April 2016). These clarified how some requirements should be applied, without changing the underlying principles, and added transitional relief.
These facts come from the Standard's page at the IFRS Foundation. IFRS 15 applies one framework, centred on the transfer of control to the customer (IFRS 15.31), to contracts for goods, services and construction alike.
What has changed in IFRS 15?
- Post-implementation review. On 30 September 2024 the IASB published its Project Summary and Feedback Statement, concluding that the requirements in IFRS 15 are working as intended (IFRS Foundation: PIR of IFRS 15).
- IFRS 18. IFRS 18 Presentation and Disclosure in Financial Statements (April 2024) makes consequential amendments to IFRS 15 for annual reporting periods beginning on or after 1 January 2027 (IFRS Foundation: changes in the 2026 edition).
Related reading and a practical tool
- Over-time revenue in construction: Construction contract accounting: percentage of completion.
- Bookkeeping entries: Accrued and deferred revenue.
- The agenda decision on residential units sold over time and capitalised interest: IAS 23 Borrowing Costs.
- Expected credit losses: IFRS 9 Financial Instruments. The Full IFRS Bundle includes an IFRS 9 provision-matrix model, together with the IFRS 16, IAS 19 and consolidation models.
Sources
- IFRS Foundation: IFRS 15 Revenue from Contracts with Customers. References in brackets are to paragraphs of the Standard and its appendices; the Standard's history and effective date are from its page.
- IFRS Foundation: Post-implementation Review of IFRS 15.
- IFRS Foundation: IFRS 9 Financial Instruments, paragraphs 5.5.15 and B5.5.35.
- IFRS Foundation: Changes in this edition (2026).