What is IFRS 15?

IFRS 15 (International Financial Reporting Standard 15) is an international accounting standard for companies. Since January 1, 2018, it specifies how companies must account for revenue from contracts with customers. It is to be applied for all financial years starting in 2018.

What does the IFRS 15 standard regulate?

IFRS 15 has superseded several old standards - including "IAS 11 Construction Contracts," "IAS 18 Revenue," "IFRIC 15 Agreements for the Construction of Real Estate" and "IFRIC 18 Transfers of Assets from Customers. It governs the accounting for revenue from contracts with customers (transfers of goods and services).

The standard was published mainly because the previous standards lacked guidance on how to deal with multiple-element arrangements. These are contracts in which entities agree to provide more than one service. This can be the case, for example, if a contract provides not only for the sale of a good, but also for its transfer, installation and commissioning.

Note: Leases are not the subject of IFRS 15, and the new leasing standard IFRS 16 was created specifically for them in 2018. However, there are various circumstances in which interactions between IFRS 15 and IFRS 16 occur.

For whom is IFRS 15 mandatory?

The IFRS (International Financial Reporting Standards) ensure that companies prepare internationally comparable annual and consolidated financial statements. In many countries, their application is mandatory, at least for publicly traded companies. This also applies to the entire European Union.

In this respect, IFRS 15 is mandatory for all German parent companies whose securities (shares or bonds) are traded on the capital market (or are in the corresponding admission process).

Where can I find the IFRS standards?

The IFRS can be ordered from the publisher, the IASB (International Accounting Standards Board), or viewed online at the website ifrs.org. The latter requires registration.

What is the 5-step model according to IFRS 15?

IFRS 15 helps companies to identify the amount and timing of revenue for accounting purposes. For this purpose, the standards contain a five-step model with which accounting entities can systematically work their way forward:

• Identification of the contract (or contracts) with a customer.
• Identification of independent performance obligations within the contract (or contracts)
• Determination of the transaction price (consideration)
• Allocation of the transaction price to the performance obligations in the contract(s)
• Revenue recognition when the entity satisfies the performance obligations

These are the five steps:

1. The first step is to check whether there is a contract with the customer that falls within the scope of IFRS 15. Several criteria must be met for this. In addition, it must be checked whether several customer contracts are to be combined for accounting purposes.
2. A contract is the basis for accounting, but not the accounting object. The latter is the "separately identifiable performance obligation" in a contract (details in the next section). Companies must determine this in the second step.
3. In the third step, the amount of revenue is identified in the form of the transaction price. This is the consideration expected to be received.
4. In the fourth step, the transaction price is allocated pro rata to the previously identified separately identifiable performance obligations (contract items). This is done on the basis of the individual selling prices. If the individual selling prices cannot be observed directly, the company must estimate them.
5. In the fifth step, the question of "when" is answered. The decisive factor here is the time or period of revenue recognition.

What is a separately identifiable performance obligation under IFRS 15?

As already mentioned, performance obligations that can be accrued independently are the relevant accounting objects. If they have been fulfilled, they trigger revenue recognition. If both of the following conditions are met, independent accrual exists:

• The customer can derive a benefit from the good or service directly or in combination with existing resources.
• It is possible to differentiate the promised goods or services from other goods or services in the contract.

Criterion 1 is generally met if the good or service is sold separately by the balancing party. For the second criterion, the following question must be asked: Does the performance obligation consist of providing a single service or a bundle of services?

In the latter case, several performance promises cannot be separated from each other. This applies in these cases, for example:

• The promised services are highly interrelated.
• Significant integration services are provided.
• Individual services significantly modify other individual services in the contract.

If one of these circumstances applies, there is a bundle of services that must be accounted for accordingly. This means that all partial services are treated as a single service obligation.

How does the new revenue recognition under IFRS 15 work?

IFRS 15 stipulates that revenue must be recognized when the corresponding performance obligation is satisfied. The decisive factor is the transfer of control over an asset. A distinction is made between two types of performance obligations:

• Performance obligations that the reporting entity fulfills at a specific point in time.
• Performance obligations that are continuously performed by the reporting entity.

In the first case, it is assumed that the service will be rendered at the second of the final transfer of control over the asset. In the second case, IFRS 15 provides for successive renue recognition.

As a rule, the so-called PoC method (percentage-of-completion method) is applied over the performance period. In some cases, the alternative zero-profit method is also used.

Important to know: According to IFRS 15, revenue may only be recognized if it is probable that the customer will meet its payment obligations when they fall due.

In crisis situations such as the Corona pandemic, uncertainties can arise in this respect within a short period of time. In this case, companies must also check whether certain sales may still be recognized in the balance sheet for contracts that are already in progress.

What are the effects of IFRS 15?

Applying IFRS 15 causes an enormous amount of work in companies. This applies at least if the 5-step model is run through manually for each individual case.

In particular, the obligation to reconcile booked revenues with the services rendered for all reporting periods is challenging. Significant simplifications can be achieved if companies automate the process with the help of software. One such solution is SAP Accounting Revenue and Reporting (SAP RAR).

SAP RAR automatically records revenue from contracts with customers in accordance with IFRS 15. This minimizes the workload and greatly accelerates the periodic processing of revenue deferrals.

The latter can optionally be event-based, time-based or performance-based (PoC-based). In addition, the solution provides an overview of all data already processed and contracts already settled.