IFRS 15: Revenue from Contracts with Customers

1.      Introduction

International Financial Reporting Standard 15 (IFRS,2017, p. 15) is a new accounting standard
introduced by the International Accounting Standards Board (IASB) in May 2014. IFRS (International
Financial Reporting Standard) 15 provides a comprehensive framework for recognizing revenue from
contracts with customers, replacing the previous guidance provided by IAS 18 and IAS 11. The new
standard aims to improve the consistency and comparability of revenue recognition practices across
industries, countries, and capital markets. IFRS 15 establishes a five-step approach for
recognizing revenue, which requires companies to identify the contract with a customer, identify
the performance obligations in the contract, determine the transaction price, allocate the
transaction price to the performance obligations, and recognize revenue when (or as) the
performance obligations are satisfied. Adopting IFRS 15 has significant implications for companies
with contracts with customers, particularly those with complex arrangements or long-term contracts.
The standard requires companies to exercise judgment, make estimates in applying the five-step
approach, and introduce new disclosure requirements.

Overall, IFRS 15 represents a significant change in revenue recognition practices and has important
implications for financial reporting, performance measurement, and investor decision-making.

2.      Literature review

The goal of IFRS 15 is to "establish the principles that an entity shall 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" (IFRS 15, para. 1). In order to
accomplish this, IFRS 15 introduces a five-step process for the recognition and measurement of
revenues. The principles are intended to bring the revenue reporting practices of firms closer to
economic reality. Identifying the contract with customers, identifying performance obligations,
figuring out the transaction price, dividing it among the performance obligations, and figuring out
when the performance obligations are satisfied are all steps in this process. Compared to IAS 18,
IFRS 15 is much more prescriptive and offers extensive guidance to promote greater consistency and
comparability across various industries and entities. There is also specific mention of the
customer obtaining legal title, which is probably highly deterministic of when revenue is
recognized for the sale of goods.

For businesses that sell combinations, such as selling phone with tariff,  (packages) of goods and
services, it was anticipated that identifying performance obligations and requiring the
distribution of the transaction price among the various performance obligations would have the
biggest effects. For instance, a physical mobile phone and mobile service are frequently combined
by telecommunications companies. The contract was frequently regarded as a single performance
obligation under IAS 18, and revenue was recorded each month as payments came in. According to IFRS
15, the mobile phone is now seen as a separate performance obligation, and the anticipated revenue
from the sale of the phone is recorded right away after it is transferred to the customer. Every
month, the mobile service is honored. Recurring revenue agreements for cloud software affect
software companies that are similar but different. Businesses can bring forward revenue for
software contracts to the time the customer takes possession of the software license, instead of
recognizing revenue monthly. The big accounting firms' articles highlighting the changes brought
about by IFRS 15 identify sectors dependent on long-term contracts as more likely to be impacted.
IFRS 15.5 mandates more thorough disclosures of revenue contracts, even in sectors where long-term
contracts are uncommon.

The role of regulation in financial reporting has been extensively discussed in the literature,
with attention given to fundamental questions like whether market incentives can be relied upon to
ensure disclosure of information or whether regulatory intervention is necessary (e. g. , Benston,
and others. Cooper and Keim (1983), Tinker (1984), Jeanjean & Stolowy (2008), and Tinker (2006).
Certain aspects of financial reporting regulation, such as the organizations in charge of
establishing accounting standards, the procedures used to do so, and the nature of those standards,
have undoubtedly been impacted by this. The focus of this study is on evaluating the impact of a
standard accounting change on the relevance of information in financial reports, which is a more
practical issue. It is not concerned with the overall effectiveness of financial reporting
regulation. This is significant because the provision of information to users to support
decision-making is the objective of financial reporting, as stated in the Conceptual Framework for
Financial Reporting (paragraph 1.2).

The switch to IFRS, which took place in many nations in 2005 (e.g., the United States), is the
standard accounting change that has garnered the most attention in the literature to date. g.
According to Ashbaugh and Pincus (2002), Carmona and Trombetta (2008), De George et al. 2016;
Horton et al. (2012), and Soderstrom & Sun (2007)). The evidence that the adoption of IFRS improved
accounting quality generally was largely concentrated in Europe (Barth et al., 2008), and based on
stock price reactions, investors realized this (Armstrong et al., 2010). Additionally, there is
proof that after adoption, earnings and book values became more significant (Barth et al., 2014)
and grew more in line with earnings and book value calculated in accordance with US GAAP (Barth et
al., 2012). These results were most likely influenced by the size of the changes, which included
the breadth of their effects on financial reports and the number of accounting standards that
changed. Simply put, the effects were substantial and widespread.

Studies looking at the effects of IFRS adoption in Australia (Chalmers et al. 2011; Clarkson and
colleagues. 2011; Cotter and colleagues. (Jeanjean & Stolowy, 2008; Jeanjean, 2012). While there is
evidence that the relevance of earnings increased with the switch to IFRS, this was not the case
for the book value of equity (Chalmers et al., 2011). This result was likely influenced by several
important elements to the current investigation. First, Australia had a policy of harmonization
that reduced the effects of transition (Cotter et al., 2012). Second, financial reports were not
always affected uniformly by the changes. When it comes to identifiable intangible assets, for
instance, there have been significant changes in accounting procedures. Evidence suggests that
after the transition, pertinent data about these assets were left out of financial reports. ,
2008). Thus, the significance of the impact on financial reports, the range of companies affected,
and the consistency of the impacts will all influence the outcomes of any evaluation of the effect
of the accounting standard change.

3. Conclusion

In conclusion, commercial contracts can have significant implications for corporate balance sheets
and cash flows under IFRS 15. The terms of the contract may affect the recognition of revenue and
the timing and amount of cash inflows, which may have important implications for financial
reporting, performance measurement, and investor decision-making. Therefore, companies need to
carefully evaluate the impact of commercial contracts on their financial statements and cash flows
under IFRS 15 and ensure compliance with the standard's requirements.

4. Resources:

Accounting Standards Board, 1994. Financial reporting standard 5 (FRS 5). Reporting the substance
of transactions.

Armstrong, C.S., Barth, M.E., Jagolinzer, A.D. & Riedl, E.J. (2010) Market reaction to the adoption
of IFRS in Europe. The Accounting Review, 85(1), 31– 61

Barth,  M.E.,  Beaver,  W.H.  &  Landsman,  W.R.  (2001)  The  relevance  of  the  value
relevance  literature  for  financial  accounting standard setting: another view. Journal of
Accounting and Economics,  31(1– 3),  77– 104

Christopher J. Napier & Christian Stadler (2020) The real effects of a new accounting standard: the
case of IFRS 15 Revenue from Contracts with Customers, Accounting and Business
Research, 50:5, 474-503

Onie, S., Ma, L., Spiropoulos, H., & Wells, P. (2022). An evaluation of the impacts of the adoption
of ifrs 15 revenue from contracts with customers. Accounting & Finance, 63(S1), 953–973

Ashbaugh, H., & Pincus, M. (2002). Domestic accounting standards, international accounting
standards, and the predictability of earnings. Journal of Accounting Research, 40(3), 583-617.

Carmona, S., & Trombetta, M. (2008). International accounting standards and accounting quality.
Journal of Accounting, Auditing & Finance, 23(2), 147-186.

De George, E. T., Li, X., & Shivakumar, L. (2016). A review of the IFRS adoption literature. Review
of Accounting Studies, 21(3), 898-1004.

Horton, J., Serafeim, G., & Serafeim, I. (2012). Does mandatory IFRS adoption improve the
information environment? Contemporary Accounting Research, 29(1), 296-332.

Soderstrom, N. S., & Sun, K. J. (2007). IFRS adoption and accounting quality: A review. European
Accounting Review, 16(4), 675-702.

Armstrong, C. S., Barth, M. E., Jagolinzer, A. D., & Riedl, E. J. (2010). Market reaction to the
adoption of IFRS in Europe. Journal of Accounting Research, 48(5), 957-989.

Barth, M. E., Landsman, W. R., Lang, M. H., & Williams, C. D. (2012). Are IFRS-based and US
GAAP-based accounting amounts comparable? Journal of Accounting and Economics, 54(1), 68-93.