IFRS 15 Revenue Recognition: The Complete Guide to Revenue from Contracts with Customers

The objective is set out in a single sentence: "The objective of this Standard 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."

Read that objective as a disclosure objective as much as a recognition one. Four of the words in it, nature, amount, timing and uncertainty, come back verbatim in the disclosure objective in IFRS 15.110 and in the disaggregation requirement in IFRS 15.114. If a revenue note does not let a reader see those four things, it fails the standard on its own stated terms, whatever the numbers do.

"An entity shall apply this Standard to all contracts with customers, except the following: (a) lease contracts within the scope of IFRS 16 Leases; (b) contracts within the scope of IFRS 17 Insurance Contracts ... (c) financial instruments and other contractual rights or obligations within the scope of IFRS 9 Financial Instruments, IFRS 10, IFRS 11, IAS 27 and IAS 28; and (d) non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers."

Two of these carry an option rather than a hard exclusion. IFRS 15.5(b) permits an entity to apply IFRS 15 instead of IFRS 17 to insurance contracts whose primary purpose is the provision of services for a fixed fee, applying paragraph 8 of IFRS 17. That matters for fixed-fee service businesses such as roadside assistance and maintenance plans, where the arrangement meets the definition of an insurance contract almost by accident. IFRS 15.5(d) is narrower than it looks: it catches the oil-swap style exchange described in the standard itself, not every barter transaction.

The counterparty test is separate from the scope test. IFRS 15.6 defines a customer as "a party that has contracted with an entity to obtain goods or services that are an output of the entity's ordinary activities in exchange for consideration", and it goes on to say that a counterparty "would not be a customer if, for example, the counterparty has contracted with the entity to participate in an activity or process in which the parties to the contract share in the risks and benefits that result from the activity or process (such as developing an asset in a collaboration arrangement) rather than to obtain the output of the entity's ordinary activities."

This is the paragraph that decides whether a pharmaceutical collaboration, a joint development agreement, or a co-promotion deal produces revenue at all. Where the parties share the risks and rewards of the development itself, there is no customer and therefore no IFRS 15 revenue, and the entity has to build an accounting policy by analogy under IAS 8. Where one party is buying an output, there is. Many collaboration agreements contain both, and IFRS 15.6 requires the entity to unpick which is which rather than treating the contract as one thing.

Partially in-scope contracts follow an order of operations. Under IFRS 15.7(a), if another standard specifies how to separate or initially measure part of the contract, the entity applies that standard first, excludes that amount from the transaction price, and then applies IFRS 15.73 to 86 to allocate what is left. Under IFRS 15.7(b), if the other standard is silent on separation or measurement, IFRS 15 does the separating.

The practical case is a contract bundling equipment finance, a lease and a service. IFRS 16 measures the lease component first, IFRS 9 measures the financing, and only the residual is allocated across the IFRS 15 performance obligations. Getting the sequence backwards changes the revenue number, because a relative stand-alone selling price allocation performed over the whole consideration will pull value into the leased asset that IFRS 16 has already measured.

"An entity shall apply this Standard for annual reporting periods beginning on or after 1 January 2018. Earlier application is permitted." IFRS 15 was issued in May 2014, the mandatory date was deferred by one year in September 2015, and clarifying amendments issued in April 2016 amended paragraphs 26, 27, 29, B1, B34 to B38, B52 to B53, B58, C2, C5 and C7, deleted B57 and added B34A, B35A, B35B, B37A, B59A, B63A, B63B, C7A and C8A.

IFRS 15 replaced IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC-31. Those are history now, not treatment. A note that still describes revenue as recognised when "the significant risks and rewards of ownership have transferred" is describing IAS 18.14, which has not been the recognition trigger since 2017 year ends. Risks and rewards survives only as one of five indicators of a point-in-time transfer of control, in IFRS 15.38(d).

"To meet the objective in paragraph 1, the core principle of this Standard is that an entity shall 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 for those goods or services."

Two phrases carry the weight. "Depict the transfer" fixes the timing to performance, not to invoicing, cash or contractual milestones. "Expects to be entitled" fixes the amount to an estimate of entitlement, which is deliberately narrower than the amount billed and deliberately wider than the amount certain. That single phrase is why variable consideration, the constraint, refund liabilities and price concessions all exist in the standard: they are the consequences of measuring entitlement rather than invoice value.

"An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (ie an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset."

This is the operative recognition rule. Note the parenthetical "(or as)": it is what allows revenue to accrue continuously rather than in a single event, and it is the hinge between over-time and point-in-time recognition. Note also that the standard calls the good or service an asset, "even if only momentarily, when they are received and used (as in the case of many services)" in IFRS 15.32. A service is an asset that is consumed on receipt. That framing is what lets a single control model cover both a machine and a cleaning contract.

"Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset."

Three components, and all three have to be present. Direction of use, substantially all the remaining benefits, and the ability to exclude others. IFRS 15.33 then lists what benefits means in cash terms: using the asset to produce goods or provide services, to enhance the value of other assets, to settle liabilities or reduce expenses, selling or exchanging it, pledging it to secure a loan, and simply holding it. The last one is often forgotten and is what makes a bill-and-hold conclusion possible at all.

"An entity shall account for a contract with a customer that is within the scope of this Standard only when all of the following criteria are met: (a) the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations; (b) the entity can identify each party's rights regarding the goods or services to be transferred; (c) the entity can identify the payment terms for the goods or services to be transferred; (d) the contract has commercial substance ... and (e) it is probable that the entity will collect the consideration to which it will be entitled".

Criterion (a) is not a documentation test. A contract can be oral or implied by customary business practice, and IFRS 15.10 confirms that "enforceability of the rights and obligations in a contract is a matter of law". Two consequences follow. An entity operating without signed paperwork can still have a contract, and an entity holding a signed document in a jurisdiction where the term is unenforceable may not. The commitment limb also does real work: a framework agreement that commits neither party to any volume rarely creates enforceable rights and obligations until an order is placed against it.

"In evaluating whether collectability of an amount of consideration is probable, an entity shall consider only the customer's ability and intention to pay that amount of consideration when it is due. The amount of consideration to which the entity will be entitled may be less than the price stated in the contract if the consideration is variable because the entity may offer the customer a price concession (see paragraph 52)."

The word "only" is the point. Collectability is assessed against ability and intention to pay, not against the entity's own commercial appetite for the risk. And the amount tested is not the invoice value. If the entity expects to grant a price concession, the concession is variable consideration under IFRS 15.52(a), the transaction price falls, and collectability is then tested against the reduced amount. Getting this order right is what separates a genuine credit problem from an implicit discount. A distributor that habitually pays 70 per cent of the invoice and has always been allowed to is not a collectability failure; it is a price concession that should have reduced revenue at inception.

Once the criteria are met at inception, they are not revisited as a matter of routine. IFRS 15.13 requires reassessment only "unless there is an indication of a significant change in facts and circumstances", and gives the example of a customer's ability to pay deteriorating significantly, in which case the entity reassesses collectability in respect of the remaining goods or services still to be transferred.

This is one of the places where IFRS 15 and ASC 606 do not sit in the same position, and it is worth being precise. The reassessment trigger and its consequences differ in the detail of application, and a group reporting under both frameworks should not assume its US filing and its IFRS filing reach the same conclusion on a deteriorating customer without testing it. The IFRS 15 against ASC 606 comparison works through where the two diverge in practice.

"When a contract with a customer does not meet the criteria in paragraph 9 and an entity receives consideration from the customer, the entity shall recognise the consideration received as revenue only when either of the following events has occurred: (a) the entity has no remaining obligations to transfer goods or services to the customer and all, or substantially all, of the consideration promised by the customer has been received by the entity and is non-refundable; or (b) the contract has been terminated and the consideration received from the customer is non-refundable."

IFRS 15.16 completes the mechanism: the entity "shall recognise the consideration received from a customer as a liability" until one of those events occurs or until the criteria in IFRS 15.9 are subsequently met, and the liability is measured at the amount of consideration received. IFRS 15.14 keeps the assessment alive: a contract that fails at inception is reassessed continuously to see whether it later passes.

Practitioners describe this as the deposit method, though the standard never uses that phrase. Two points get missed. First, the liability is not a contract liability in the IFRS 15.106 sense, because there is no contract for accounting purposes; it is a liability that represents either an obligation to deliver or an obligation to refund. Second, "substantially all" in IFRS 15.15(a) is a genuine threshold, not a formality. Cash collected against a failed contract cannot be released to revenue simply because delivery has happened, if a material part of the price is still outstanding.

An entity "shall combine two or more contracts entered into at or near the same time with the same customer (or related parties of the customer)" and account for them as one if any of three criteria in IFRS 15.17 is met: the contracts are negotiated as a package with a single commercial objective, the consideration in one depends on the price or performance of the other, or the goods or services in the contracts are a single performance obligation under IFRS 15.22 to 30.

Combination is mandatory, not elective, and only one criterion is needed. This matters for pricing structures where a loss-making equipment sale is signed alongside a profitable service contract on the same day. Left separate, the entity reports a loss on delivery and a margin over the service period. Combined, one transaction price is allocated across the whole and the pattern changes. IFRS 15.17(b) also catches the reverse case, where a discount in one document is contingent on performance under another.

IFRS 15.11 restricts the standard to "the duration of the contract (ie the contractual period) in which the parties to the contract have present enforceable rights and obligations". IFRS 15.12 goes further: a contract "does not exist if each party to the contract has the unilateral enforceable right to terminate a wholly unperformed contract without compensating the other party", and defines wholly unperformed as nothing transferred and nothing received or receivable.

Together these set the contract term for accounting, which is often shorter than the commercial term. A month-to-month service agreement cancellable by either side without penalty has a one-month accounting term, however long the customer has actually been with the entity. That drives the remaining performance obligation disclosure under IFRS 15.120, the material right analysis under IFRS 15.B40, and the amortisation period for capitalised commissions under IFRS 15.99.

"At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer either: (a) a good or service (or a bundle of goods or services) that is distinct; or (b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer".

Limb (b) is the series provision, and it is a simplification that behaves like a requirement. IFRS 15.23 sets two conditions: each distinct good or service in the series would meet the IFRS 15.35 criteria to be satisfied over time, and the same method under IFRS 15.39 to 40 would be used to measure progress for each. Where both hold, a stream of daily or monthly services is a single performance obligation rather than 365 or 12 of them. That is not cosmetic. It changes how variable consideration is allocated, because IFRS 15.85 then permits allocation to a distinct good or service within the single obligation, and it changes the remaining performance obligation disclosure.

IFRS 15.24 warns that performance obligations "may not be limited to the goods or services that are explicitly stated in that contract", because a contract can include promises implied by customary business practices, published policies or specific statements where those create a valid expectation in the customer. IFRS 15.25 draws the boundary from the other side: performance obligations "do not include activities that an entity must undertake to fulfil a contract unless those activities transfer a good or service to a customer", and it gives set-up activities as the example.

These two paragraphs are a matched pair and they catch opposite errors. IFRS 15.24 catches the entity that has never charged for a service it always provides, such as free installation, unpriced upgrades or a published goodwill returns policy, and therefore never identified it as a promise. IFRS 15.25 catches the entity that has capitalised or deferred implementation and set-up fees as though they were a separate promise. A non-refundable set-up fee is almost never a performance obligation; it is an advance payment against the services that follow.

"A good or service that is promised to a customer is distinct if both of the following criteria are met: (a) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (ie the good or service is capable of being distinct); and (b) the entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (ie the promise to transfer the good or service is distinct within the context of the contract)."

Criterion (a) is a question about the item. Criterion (b) is a question about the promise. Almost every disputed conclusion turns on (b), because most goods and services pass (a) comfortably. IFRS 15.28 sets a low bar for (a): the customer can benefit if the item "could be used, consumed, sold for an amount that is greater than scrap value or otherwise held in a way that generates economic benefits", and a readily available resource is one sold separately by the entity or another entity, or already obtained by the customer. The fact that the entity regularly sells the item separately is evidence that (a) is met.

IFRS 15.29 states the objective of the second criterion first: "the objective is to determine whether the nature of the promise, within the context of the contract, is to transfer each of those goods or services individually or, instead, to transfer a combined item or items to which the promised goods or services are inputs." It then lists three factors indicating that promises are not separately identifiable:

(a) the entity provides "a significant service of integrating the goods or services with other goods or services promised in the contract into a bundle of goods or services that represent the combined output or outputs for which the customer has contracted";

(b) "one or more of the goods or services significantly modifies or customises, or are significantly modified or customised by, one or more of the other goods or services promised in the contract";

(c) "the goods or services are highly interdependent or highly interrelated", which the standard explains as each being significantly affected by one or more of the others, "because the entity would not be able to fulfil its promise by transferring each of the goods or services independently".

Read factor (c) carefully, because it is the one most often misapplied. Interdependence in the IFRS 15.29(c) sense is a two-way relationship between the promises themselves. It is not established by the customer needing both items to achieve a commercial outcome, and it is not established by the fact that the customer has to wait until the whole contract completes before it gets the benefit it wanted. Software plus implementation services is the classic test case: if the software is functional on delivery and the implementation is generic configuration that another vendor could perform, the promises are separately identifiable; if the vendor is writing bespoke code that transforms the licensed product, factor (b) is engaged and they are not.

"If a promised good or service is not distinct, an entity shall combine that good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct. In some cases, that would result in the entity accounting for all the goods or services promised in a contract as a single performance obligation."

This is an iterative instruction, not a default. The entity combines upward only as far as it needs to reach a distinct bundle. Collapsing an entire contract into one obligation at the first sign of difficulty skips the iteration and usually produces revenue that is too smooth and too late.

Warranties split in two, and the standard's own terms are assurance-type and service-type. IFRS 15.B29 says that where a customer "has the option to purchase a warranty separately (for example, because the warranty is priced or negotiated separately), the warranty is a distinct service", which takes an allocation of the transaction price under IFRS 15.73 to 86. IFRS 15.B30 says that where the customer has no such option, the entity accounts for the warranty under IAS 37 "unless the promised warranty, or a part of the promised warranty, provides the customer with a service in addition to the assurance that the product complies with agreed-upon specifications".

IFRS 15.B31 gives the three factors for that assessment: whether the warranty is required by law, which "indicates that the promised warranty is not a performance obligation"; the length of the coverage period, where longer points towards a service; and the nature of the tasks promised, where tasks necessary to provide the assurance itself, such as return shipping for a defective product, "likely do not give rise to a performance obligation". IFRS 15.B32 adds the practical fallback: where an entity promises both an assurance-type and a service-type warranty but cannot reasonably account for them separately, it accounts for both together as a single performance obligation.

There is no third category. Terms such as "performance warranty" do not appear in IFRS 15 and using them in a policy note signals that the B28 to B33 analysis has not been done. The mechanics, including the interaction with rights of return and customer options, are worked through in the guide to warranties, rights of return and customer options.

An option to acquire additional goods or services "gives rise to a performance obligation in the contract only if the option provides a material right to the customer that it would not receive without entering into that contract (for example, a discount that is incremental to the range of discounts typically given for those goods or services to that class of customer in that geographical area or market)". IFRS 15.B41 confirms the converse: an option priced at the stand-alone selling price is a marketing offer, not a material right, even if it can only be exercised by having entered the first contract.

Loyalty points, renewal discounts and free upgrade rights all live here. IFRS 15.B42 requires the stand-alone selling price of the option to be estimated where it is not observable, reflecting both the discount the customer would obtain and the likelihood of exercise, adjusted for any discount available without exercising the option.

Where a third party is involved, IFRS 15.B34 requires the entity to determine "whether the nature of its promise is a performance obligation to provide the specified goods or services itself (ie the entity is a principal) or to arrange for those goods or services to be provided by the other party (ie the entity is an agent)", and to make that determination for each specified good or service. IFRS 15.B35 states the test: "An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer."

The consequence is gross against net. A principal recognises "the gross amount of consideration to which it expects to be entitled" (IFRS 15.B35B), an agent recognises "the amount of any fee or commission" (IFRS 15.B36). Profit is identical; revenue can differ by an order of magnitude, which is why the conclusion attracts regulator attention in marketplace, travel and reseller businesses. The indicators in IFRS 15.B37, primary responsibility for fulfilment, inventory risk and discretion in establishing price, support the control conclusion; they do not replace it. See the detailed treatment in principal versus agent under IFRS 15.

"The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both."

Note "expects to be entitled" rather than "expects to receive". Entitlement is a contractual and legal concept; receipt is a cash concept. A customer who is contractually obliged to pay 100 and is expected to pay 60 because of an anticipated concession gives a transaction price of 60. A customer contractually obliged to pay 100 who may simply default gives a transaction price of 100 and an expected credit loss under IFRS 9. Same cash, different line in profit or loss.

"For the purpose of determining the transaction price, an entity shall assume that the goods or services will be transferred to the customer as promised in accordance with the existing contract and that the contract will not be cancelled, renewed or modified."

Short paragraph, large effect. Expected renewals are excluded from the transaction price, which is why the remaining performance obligation disclosure under IFRS 15.120 for a rolling monthly contract is one month of revenue and not the expected customer lifetime. It also means that an entity cannot reduce the transaction price for an expected termination it has not yet agreed.

IFRS 15.51 lists the sources: "discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties or other similar items", and adds that consideration is variable where entitlement is contingent on a future event, giving a right of return and a milestone bonus as examples. IFRS 15.52 extends variability beyond the written terms: consideration is variable where the customer has a valid expectation from customary business practices, published policies or specific statements that the entity will accept less than the stated price, or where other facts indicate the entity intends to offer a price concession.

IFRS 15.52 is the paragraph that catches implicit price concessions. A fixed-price contract on paper can carry variable consideration in substance, and the evidence for it sits in credit note history and settlement patterns rather than in the contract file.

"An entity shall estimate an amount of variable consideration by using either of the following methods, depending on which method the entity expects to better predict the amount of consideration to which it will be entitled: (a) The expected value ... the sum of probability-weighted amounts in a range of possible consideration amounts. An expected value may be an appropriate estimate of the amount of variable consideration if an entity has a large number of contracts with similar characteristics. (b) The most likely amount ... the single most likely amount in a range of possible consideration amounts ... The most likely amount may be an appropriate estimate of the amount of variable consideration if the contract has only two possible outcomes (for example, an entity either achieves a performance bonus or does not)."

The choice is not free. IFRS 15.53 sets a predictive criterion, and IFRS 15.54 requires the chosen method to be applied consistently throughout the contract, using all reasonably available historical, current and forecast information, and identifying "a reasonable number of possible consideration amounts". Two outcomes point to most likely amount. A population of similar contracts points to expected value.

"An entity shall include in the transaction price some or all of an amount of variable consideration estimated in accordance with paragraph 53 only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved."

Three words control this test. "Highly probable" is a high threshold, well above more likely than not. "Significant" is measured against cumulative revenue recognised, not against the variable amount alone, so a small variable element on a large contract is rarely constrained. "Cumulative" means the assessment is made against everything recognised to date on the contract, which is why the constraint bites hardest early in a long contract and loosens as the certain revenue accumulates.

IFRS 15.57 requires the entity to consider both likelihood and magnitude, and lists five factors that increase either: consideration "highly susceptible to factors outside the entity's influence", such as market volatility, the judgement or actions of third parties, weather and obsolescence risk; uncertainty not expected to resolve for a long period; limited entity experience or experience with limited predictive value; a practice of offering a broad range of price concessions or changing payment terms; and a contract with "a large number and broad range of possible consideration amounts".

Factor (c) is the one that catches new products and new markets. A rebate estimate built from three months of data on a newly launched product is exactly the situation the Board had in mind, and the response required by IFRS 15.56 is to include less in the transaction price, not to include the full amount and add a caveat to the notes.

IFRS 15.58 carves out one class of variable consideration entirely: "An entity shall apply paragraph B63 to account for consideration in the form of a sales-based or usage-based royalty that is promised in exchange for a licence of intellectual property." Under that rule such royalties are recognised at the later of the subsequent sale or usage occurring and the performance obligation to which the royalty relates being satisfied.

This is a bright line, not a constraint judgement, and it is one of the areas where IFRS 15 and ASC 606 wording is closely aligned but the licensing guidance around it is not. Do not estimate a sales-based royalty on a licence of intellectual property and then constrain it; the royalty exception replaces that analysis.

"To account for the transfer of products with a right of return (and for some services that are provided subject to a refund), an entity shall recognise all of the following: (a) revenue for the transferred products in the amount of consideration to which the entity expects to be entitled (therefore, revenue would not be recognised for the products expected to be returned); (b) a refund liability; and (c) an asset (and corresponding adjustment to cost of sales) for its right to recover products from customers on settling the refund liability."

IFRS 15.B22 adds that the promise to stand ready to accept a return is not a separate performance obligation. IFRS 15.B25 measures the return asset "by reference to the former carrying amount of the product (for example, inventory) less any expected costs to recover those products (including potential decreases in the value to the entity of returned products)", updates it at each reporting date, and requires it to be presented separately from the refund liability. Netting the asset against the liability is a presentation error the standard specifically forecloses.

IFRS 15.60 requires an adjustment for the time value of money where the timing of payments "provides the customer or the entity with a significant benefit of financing the transfer of goods or services", whether or not the financing is explicit. IFRS 15.61 states the objective: to recognise revenue at "the price that a customer would have paid for the promised goods or services if the customer had paid cash for those goods or services when (or as) they transfer to the customer (ie the cash selling price)", and requires the entity to consider both the difference between promised consideration and cash selling price, and the combined effect of the expected payment interval and prevailing market interest rates.

Financing can run in either direction. Customer advances on a multi-year contract give the entity the benefit of financing and produce interest expense, not interest income, alongside a growing contract liability. That surprises finance teams who assume a financing component always increases revenue.

IFRS 15.62 lists three situations where there is no significant financing component regardless of the IFRS 15.61 assessment: the customer paid in advance and controls the timing of transfer; a substantial amount of the consideration is variable on an event not substantially within either party's control, such as a sales-based royalty; or the difference between promised consideration and cash selling price arises for a reason other than finance and is proportional to that reason, such as retention held as protection against non-performance.

IFRS 15.63 then gives the practical expedient: no adjustment is required if the entity expects at contract inception that the interval between transfer and payment "will be one year or less". IFRS 15.64 fixes the discount rate as the rate in a separate financing transaction between the entity and the customer at inception, reflecting credit characteristics and any collateral, and prohibits updating it afterwards. IFRS 15.129 requires disclosure of the fact that the IFRS 15.63 expedient has been taken.

Non-cash consideration is measured at fair value (IFRS 15.66). If fair value cannot be reasonably estimated, IFRS 15.67 requires the entity to measure it indirectly "by reference to the stand-alone selling price of the goods or services promised to the customer (or class of customer) in exchange for the consideration". IFRS 15.68 distinguishes variability caused by the form of the consideration, such as a change in a share price, from variability caused by anything else, such as the entity's own performance, and applies the constraint in IFRS 15.56 to 58 only to the latter. IFRS 15.69 treats customer-contributed goods or services as non-cash consideration where the entity obtains control of them.

IFRS 15.70 defines consideration payable to a customer as cash paid or expected to be paid to the customer, or to other parties who purchase the entity's goods from the customer, and includes credits, coupons and vouchers applicable against amounts owed. The default treatment is "a reduction of the transaction price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct good or service (as described in paragraphs 26 to 30) that the customer transfers to the entity."

IFRS 15.71 handles the middle case. Where the payment is for a distinct good or service but exceeds its fair value, the excess reduces the transaction price; where fair value cannot be reasonably estimated, all of it reduces the transaction price. IFRS 15.72 fixes the timing at the later of recognising the related revenue and paying or promising to pay the consideration, including where the promise is implied by customary practice.

This is the paragraph behind trade spend, listing fees, slotting allowances and co-operative advertising in consumer goods. The question is never whether the payment is commercially justified. It is whether the entity receives a distinct good or service it could have bought from anyone else, and whether it can support the fair value of that good or service. Payments for shelf space almost never survive that test and therefore reduce revenue.

IFRS 15.73 states the allocation objective: to allocate "in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer". IFRS 15.74 states the mechanism: "an entity shall allocate the transaction price to each performance obligation identified in the contract on a relative stand-alone selling price basis in accordance with paragraphs 76 to 80, except as specified in paragraphs 81 to 83 (for allocating discounts) and paragraphs 84 to 86 (for allocating consideration that includes variable amounts)."

IFRS 15.75 switches the whole of this off for single-obligation contracts, with one carve-out: IFRS 15.84 to 86 can still apply where a series of distinct goods or services is treated as one performance obligation under IFRS 15.22(b) and the consideration includes variable amounts.

"The stand-alone selling price is the price at which an entity would sell a promised good or service separately to a customer. The best evidence of a stand-alone selling price is the observable price of a good or service when the entity sells that good or service separately in similar circumstances and to similar customers. A contractually stated price or a list price for a good or service may be (but shall not be presumed to be) the stand-alone selling price of that good or service."

The bracketed clause is the whole point of the paragraph and it is routinely ignored. Where a contract itemises a licence at £80,000 and services at £20,000, those figures are an input to the analysis and not the conclusion. If the entity habitually sells the same licence for £50,000 and the same services at day rates totalling £30,000, then the stand-alone selling prices are £50,000 and £30,000, the contract is a £20,000 discount on an £80,000 bundle, and the allocation follows the £50,000 to £30,000 ratio. Reallocating a contract that already looks split is one of the most common adjustments in a first-year IFRS 15 audit.

Where the stand-alone selling price is not directly observable, IFRS 15.78 requires an estimate that meets the allocation objective in IFRS 15.73, considering all reasonably available information about market conditions, entity-specific factors and the customer, and requires the entity to "maximise the use of observable inputs and apply estimation methods consistently in similar circumstances". IFRS 15.79 lists three suitable methods:

(a) Adjusted market assessment approach. Evaluate the market and estimate what a customer in it would pay, which "might also include referring to prices from the entity's competitors for similar goods or services and adjusting those prices as necessary to reflect the entity's costs and margins."

(b) Expected cost plus a margin approach. Forecast the expected costs of satisfying the obligation and add an appropriate margin.

(c) Residual approach. Total transaction price less the observable stand-alone selling prices of the other goods or services. This one is restricted. IFRS 15.79(c) permits it only where the entity sells the same good or service to different customers for a broad range of amounts, so no representative price is discernible, or where it has not yet established a price and the item has never been sold stand-alone.

The restriction on the residual approach is the guardrail against reverse-engineering. Using a residual for the item you want to recognise first, on the grounds that its price is hard to determine, is not permitted unless one of the two IFRS 15.79(c) conditions actually holds. IFRS 15.80 allows a combination of methods, for example a residual to estimate the aggregate price of the highly variable items and another method to split that aggregate, but requires the entity to test the result back against the objective in IFRS 15.73.

IFRS 15.81 identifies a discount as arising where "the sum of the stand-alone selling prices of those promised goods or services in the contract exceeds the promised consideration in a contract", and requires the entity to "allocate a discount proportionately to all performance obligations in the contract" except where IFRS 15.82 applies. IFRS 15.82 permits allocation to one or more but not all obligations only if all three criteria are met: the entity regularly sells each distinct item stand-alone; it also regularly sells a bundle of some of them at a discount to the sum of their stand-alone selling prices; and the discount attributable to that bundle "is substantially the same as the discount in the contract", with an analysis of the bundle providing observable evidence of which obligations the discount belongs to.

IFRS 15.83 adds the sequencing rule: where a discount is allocated entirely to specific obligations under IFRS 15.82, that allocation happens before any residual approach is used under IFRS 15.79(c). Doing it the other way round pushes the discount into the residual item and distorts both.

IFRS 15.84 recognises that a variable amount may relate to the whole contract or to a specific part of it, either one or more but not all performance obligations, or one or more but not all of the distinct goods or services within a series treated as a single performance obligation under IFRS 15.22(b). IFRS 15.85 allows the variable amount, and later changes to it, to be allocated entirely to that part only where both criteria are met: the terms of the variable payment "relate specifically to the entity's efforts to satisfy the performance obligation or transfer the distinct good or service (or to a specific outcome from satisfying" it), and doing so "is consistent with the allocation objective in paragraph 73 when considering all of the performance obligations and payment terms in the contract."

IFRS 15.86 sends everything else back through the ordinary allocation in IFRS 15.73 to 83. The practical case is a multi-year managed service where the fee for year 3 rises with an inflation index. The uplift relates specifically to year 3, so under IFRS 15.85 it can be allocated to that year rather than smeared across the contract. The contrasting case is a completion bonus on a bundled contract with several obligations, where the bonus relates to the contract as a whole and has to be allocated across all of them.

"An entity shall allocate to the performance obligations in the contract any subsequent changes in the transaction price on the same basis as at contract inception. Consequently, an entity shall not reallocate the transaction price to reflect changes in stand-alone selling prices after contract inception. Amounts allocated to a satisfied performance obligation shall be recognised as revenue, or as a reduction of revenue, in the period in which the transaction price changes."

Stand-alone selling prices are frozen at inception. A change in the transaction price is allocated on the original ratios, and the portion belonging to obligations already satisfied hits revenue immediately as a catch-up. That is why a rebate settling above expectation in year 3 of a bundled contract produces an immediate revenue adjustment for the delivered hardware as well as a prospective change for the ongoing service.

"An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met: (a) the customer simultaneously receives and consumes the benefits provided by the entity's performance as the entity performs; (b) the entity's performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced; or (c) the entity's performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date."

Criterion (c) is conjunctive. Both limbs are needed. An entity building a highly customised asset with no alternative use, but with no enforceable right to payment for work done to date, recognises at a point in time. That single feature, usually a termination clause that compensates for costs but not for margin, changes a construction contract from an over-time contract to a point-in-time contract and moves years of revenue.

IFRS 15.B3 says the IFRS 15.35(a) assessment is straightforward for "routine or recurring services (such as a cleaning service) in which the receipt and simultaneous consumption by the customer of the benefits of the entity's performance can be readily identified". IFRS 15.B4 supplies a test for the harder cases: the obligation is satisfied over time if "another entity would not need to substantially re-perform the work that the entity has completed to date if that other entity were to fulfil the remaining performance obligation to the customer", disregarding contractual restrictions on transfer and presuming the replacement entity would not have the benefit of assets the original entity controls.

The re-performance test is the useful one in practice. A payroll bureau that has processed nine months of payroll has delivered benefits a successor would not repeat, so IFRS 15.35(a) is met. A consultancy that has done nine months of work on a report it has not yet issued has produced nothing a successor could use without re-doing it, so IFRS 15.35(a) is not met and the analysis moves to (b) or (c).

IFRS 15.36 defines the no-alternative-use limb: an asset has no alternative use if the entity is "restricted contractually from readily directing the asset for another use during the creation or enhancement of that asset or limited practically from readily directing the asset in its completed state for another use", assessed at contract inception and not updated unless a modification substantively changes the obligation. IFRS 15.B6 confirms that "the possibility of the contract with the customer being terminated is not a relevant consideration". IFRS 15.B7 requires a contractual restriction to be substantive, meaning the customer could enforce its rights if the entity tried to redirect the asset, and treats a restriction as not substantive where the asset is largely interchangeable. IFRS 15.B8 defines a practical limitation as one where redirecting the asset would cause "significant economic losses", through rework costs or a forced sale at a significant loss.

Standard apartments in a block are usually interchangeable and therefore have an alternative use. A refinery module designed to a single customer's specification usually does not. The distinction is not the value of the asset, it is whether the entity could sell it to someone else without a significant economic loss.

IFRS 15.37 requires the entity to consider the contract terms "as well as any laws that apply to the contract", states that the right to payment need not be for a fixed amount, and sets the standard: "at all times throughout the duration of the contract, the entity must be entitled to an amount that at least compensates the entity for performance completed to date if the contract is terminated by the customer or another party for reasons other than the entity's failure to perform as promised."

IFRS 15.B9 supplies the measure. Compensation for performance completed to date is "an amount that approximates the selling price of the goods or services transferred to date (for example, recovery of the costs incurred by an entity in satisfying the performance obligation plus a reasonable profit margin) rather than compensation for only the entity's potential loss of profit". The margin does not have to equal the contract margin, but the entity must be entitled to either a proportion of the expected contract margin reflecting performance to date, or a reasonable return on its cost of capital for similar contracts.

Read that against the typical termination clause. Recovery of costs incurred, with no margin element, does not satisfy IFRS 15.B9 and therefore does not satisfy IFRS 15.35(c). Refundable milestone payments do not help either: IFRS 15.B13 says a payment schedule "does not necessarily indicate whether an entity has an enforceable right to payment for performance completed to date", because the consideration might be refundable for reasons other than the entity's failure to perform.

Where none of the IFRS 15.35 criteria is met, the entity identifies the point at which control transfers using the requirements in IFRS 15.31 to 34, supported by five indicators in IFRS 15.38: "(a) The entity has a present right to payment for the asset ... (b) The customer has legal title to the asset ... (c) The entity has transferred physical possession of the asset ... (d) The customer has the significant risks and rewards of ownership of the asset ... (e) The customer has accepted the asset".

These are indicators, not conditions, and the standard is explicit that they can conflict. IFRS 15.38(c) itself notes that "physical possession may not coincide with control", giving consignment and bill-and-hold arrangements as the two directions of that mismatch. IFRS 15.38(b) says retaining legal title solely as protection against non-payment "would not preclude the customer from obtaining control". IFRS 15.38(d) is where risks and rewards survives from IAS 18, demoted to one indicator among five.

IFRS 15.39 sets the objective of measuring progress: "to depict an entity's performance in transferring control of goods or services promised to a customer". IFRS 15.40 requires a single method for each performance obligation, applied consistently to similar obligations in similar circumstances, remeasured at the end of each reporting period.

A single method per obligation. Not a blend, and not one method for cost and another for revenue.

Output methods "recognise revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract", and include surveys of performance, appraisals of results, milestones reached, time elapsed and units produced or delivered (IFRS 15.B15). The paragraph then gives its own warning: an output method based on units produced or delivered "would not faithfully depict an entity's performance ... if, at the end of the reporting period, the entity's performance has produced work in progress or finished goods controlled by the customer that are not included in the measurement of the output."

Input methods recognise revenue on the basis of the entity's efforts or inputs, such as resources consumed, labour hours, costs incurred, time elapsed or machine hours, relative to total expected inputs (IFRS 15.B18). IFRS 15.B19 then requires the entity to strip out inputs that do not depict performance, and gives two specific adjustments: costs attributable to significant inefficiencies not reflected in the contract price, and costs not proportionate to progress, where the best depiction may be to recognise revenue equal to the cost of a good used to satisfy the obligation, in the circumstances set out in IFRS 15.B19(b).

That second adjustment is the uninstalled materials rule. Where a contractor procures a customer-specified component early, the cost is significant, and the customer obtains control of it well before the related service, revenue is recognised at cost with zero margin on that component rather than allowing it to pull margin forward through a cost-to-cost calculation.

IFRS 15.44 permits over-time revenue "only if the entity can reasonably measure its progress", and says the entity would not be able to do so if it lacks the reliable information needed to apply an appropriate method. IFRS 15.45 supplies the answer for the early stage of a contract: where the outcome cannot be reasonably measured but the entity expects to recover its costs, it recognises "revenue only to the extent of the costs incurred until such time that it can reasonably measure the outcome".

This is zero-margin revenue, and it is a temporary state with a defined exit. It is not a policy choice for uncomfortable contracts, and an entity sitting in IFRS 15.45 for several years is telling the reader that its own project controls cannot measure progress.

"An entity shall recognise as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs" (IFRS 15.91). IFRS 15.92 defines incremental costs as "those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, a sales commission)". IFRS 15.93 expenses costs that would have been incurred regardless of whether the contract was won, unless they are explicitly chargeable to the customer either way. IFRS 15.94 permits an entity to expense incremental costs as incurred where the amortisation period would be one year or less.

"Shall recognise" makes IFRS 15.91 mandatory, not a policy choice. The counterfactual test in IFRS 15.92 is strict: a commission paid only on signature is incremental, a bid team's salary is not, and a commission paid whether or not the contract is won fails the test even if it is called a sales commission. Bonuses tied to a mixture of contract wins and other targets have to be unpicked, and where they cannot be, they generally do not meet IFRS 15.92.

Costs to fulfil a contract are capitalised only where they fall outside IAS 2, IAS 16, IAS 38 and other standards, and meet all three criteria in IFRS 15.95: the costs relate directly to a contract or a specifically identifiable anticipated contract, they "generate or enhance resources of the entity that will be used in satisfying (or in continuing to satisfy) performance obligations in the future", and they are expected to be recovered.

IFRS 15.97 lists what relates directly: direct labour, direct materials, allocations of costs relating directly to the contract such as contract management, insurance and depreciation of tools, equipment and right-of-use assets used in fulfilling the contract, costs explicitly chargeable to the customer, and other costs incurred only because the entity entered the contract. IFRS 15.98 forces four categories straight to profit or loss: general and administrative costs unless explicitly chargeable, "costs of wasted materials, labour or other resources to fulfil the contract that were not reflected in the price of the contract", costs relating to satisfied or partially satisfied obligations, and costs where the entity cannot distinguish whether they relate to satisfied or unsatisfied obligations.

IFRS 15.98(b) is the one that hurts on a troubled contract. Rework and inefficiency not priced into the contract is expensed immediately, and cannot be carried as a fulfilment asset on the argument that the customer will eventually pay for it through a variation. If the entity believes it will, that belief belongs in the transaction price under IFRS 15.19 and the constraint, not in an asset.

The asset is amortised "on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates", and IFRS 15.99 expressly permits the asset to relate to goods or services under a specific anticipated contract. IFRS 15.100 requires the amortisation period to be updated for significant changes in expected transfer timing, as a change in estimate under IAS 8.

The impairment test in IFRS 15.101 compares carrying amount against the remaining consideration expected for the related goods or services, less the costs of providing them that have not yet been expensed. IFRS 15.102 requires that remaining consideration to be determined using the transaction price principles but ignoring the constraint in IFRS 15.56 to 58, and adjusted for customer credit risk. IFRS 15.103 sets the order: impair assets under other standards first, then the contract cost asset, then include it in the cash-generating unit for IAS 36. IFRS 15.104 permits reversal, capped at the amount that would have been carried had no impairment been recognised.

The point most often missed is in IFRS 15.99: a commission paid on an initial contract may have to be amortised over the expected customer relationship, including anticipated renewals, rather than over the stated contract term, where the initial commission also relates to those renewals. A commission earned on a two-year contract that is not paid again on renewal is a commission relating to the whole relationship. Amortising it over two years front-loads the charge.

IFRS 15.105 requires the contract to be presented as a contract asset or a contract liability "depending on the relationship between the entity's performance and the customer's payment", with unconditional rights to consideration presented separately as a receivable. IFRS 15.106 defines a contract liability as the obligation to transfer goods or services for which consideration has been received or is due. IFRS 15.107 defines a contract asset as "an entity's right to consideration in exchange for goods or services that the entity has transferred to a customer", excluding amounts presented as a receivable, and requires it to be assessed for impairment under IFRS 9 on the same basis as a financial asset.

IFRS 15.108 draws the line that matters: "A receivable is an entity's right to consideration that is unconditional. A right to consideration is unconditional if only the passage of time is required before payment of that consideration is due." A right conditional on anything else, typically further performance, is a contract asset. The distinction is not about invoicing. An amount can be unbilled and still be a receivable if nothing but time stands between the entity and payment, and an amount can be invoiced and still be conditional in substance.

IFRS 15.109 permits alternative labels, such as accrued income or deferred revenue, provided the entity gives users enough information to distinguish receivables from contract assets. Labels are free; the distinction is not.

IFRS 15.110 sets the objective and then names the three buckets: information about contracts with customers, about the significant judgements and changes in judgements made in applying the standard, and about assets recognised from the costs to obtain or fulfil a contract. IFRS 15.111 requires the entity to consider the level of detail and to "aggregate or disaggregate disclosures so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have substantially different characteristics."

IFRS 15.111 cuts both ways and both failures are common. A three-line revenue note in a group with four distinct business models aggregates away the information. A twelve-page note that repeats the standard's requirements without applying them buries it.

IFRS 15.114 requires revenue to be disaggregated "into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors", applying IFRS 15.B87 to B89 in selecting them. IFRS 15.B89 gives seven example categories: type of good or service, geographical region, market or type of customer, type of contract such as fixed-price against time-and-materials, contract duration, timing of transfer of goods or services, and sales channels.

The categories are examples, not a menu to be adopted wholesale. IFRS 15.115 then requires the entity to explain the relationship between the disaggregation and its IFRS 8 segment revenue. Where the disaggregation exactly equals the segment note and nothing more, the entity should be able to explain why no further split is needed, because the two disclosures answer different questions.

IFRS 15.116 requires opening and closing balances of receivables, contract assets and contract liabilities if not otherwise presented, revenue recognised in the period that was in the opening contract liability balance, and revenue recognised from performance obligations satisfied or partially satisfied in previous periods. IFRS 15.117 requires an explanation of how the timing of satisfaction relates to the typical timing of payment and the effect on the balances. IFRS 15.118 requires an explanation of significant changes in the balances, with both qualitative and quantitative information, listing business combinations, cumulative catch-up adjustments, impairment of a contract asset, and changes in the time frame for a right to become unconditional or for an obligation to be satisfied.

The IFRS 15.116(c) number is the one analysts read most closely and the one entities most often omit. Revenue recognised from obligations satisfied in earlier periods is, by definition, revenue arising from a change in estimate. A large or volatile figure is direct evidence about the quality of the entity's estimation.

IFRS 15.120 requires disclosure of the aggregate transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the reporting date, and an explanation of when it is expected to be recognised, either quantitatively in appropriate time bands or qualitatively. IFRS 15.121 gives a practical expedient where the contract has an original expected duration of one year or less, or where revenue is recognised under the right-to-invoice expedient in IFRS 15.B16. IFRS 15.122 requires the entity to explain qualitatively whether it is applying that expedient and whether any consideration is excluded from the transaction price, giving constrained variable consideration as the example.

This is the closest thing IFRS gives to a backlog disclosure, and its comparability depends entirely on IFRS 15.122. Two entities in the same sector can report very different remaining performance obligation figures purely because one has constrained more variable consideration or applied the IFRS 15.121 expedient more widely. Without the IFRS 15.122 explanation the figures cannot be compared at all.

IFRS 15.123 requires disclosure of the judgements, and changes in judgements, that significantly affect the amount and timing of revenue, specifically in determining the timing of satisfaction of performance obligations and in determining the transaction price and the amounts allocated to them.

IFRS 15.124 then makes the requirement concrete for over-time obligations. The entity shall disclose both "(a) the methods used to recognise revenue (for example, a description of the output methods or input methods used and how those methods are applied); and (b) an explanation of why the methods used provide a faithful depiction of the transfer of goods or services."

Limb (b) is the most frequently unmet requirement in the whole standard. Naming a cost-to-cost input method satisfies (a) and does nothing for (b). What (b) asks is why costs incurred are a faithful proxy for transfer of control in this entity's contracts: what proportion of cost is labour whose deployment tracks progress, whether materials are included or excluded and why, how inefficiency is stripped out under IFRS 15.B19, and why an output measure was rejected. That is three or four sentences of entity-specific explanation, and its absence is the single most common revenue finding in regulator correspondence.

IFRS 15.125 requires disclosure of significant judgements in evaluating when the customer obtains control for point-in-time obligations. IFRS 15.126 requires the methods, inputs and assumptions used in determining the transaction price including estimating variable consideration, adjusting for the time value of money and measuring non-cash consideration; in assessing whether an estimate is constrained; in allocating the transaction price including estimating stand-alone selling prices and allocating discounts and variable consideration; and in measuring obligations for returns, refunds and similar obligations. IFRS 15.127 and 128 cover contract cost assets: the judgements made, the amortisation method, closing balances by main category, and amortisation and impairment for the period. IFRS 15.129 requires disclosure of the use of the practical expedients in IFRS 15.63 and 94.