CA Arpit Arora
Need for new financial reporting standard IFRS 15 for revenue recognition:-
The basic need of this new standard is to bring the uniformity in recognition requirements of revenue across all the sectors for e.g. Real Estate, Power , etc which were not covered earlier under one umbrella.
Information about revenue is used to assess a company’s financial performance and position and to compare that company with other companies. However, previous revenue requirements in IFRS and US GAAP made it difficult for investors and analysts (‘investors’) to understand and compare a company’s revenue.
IFRS 15 establishes a comprehensive framework for determining when to recognize revenue and how much revenue to recognize. The core principle in that framework is that company should recognize revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
A short summary about the new procedure of recognizing revenue under IFRS 15- “Revenue from contract(s) with customer.
Important Note:-
For revenue recognition criteria to fulfill, an entity has to consider whether benefits of promised goods of services have been consumed by customer. There are separate norms specified for various aspects covered in “Satisfaction of performance obligation” by entity and “Receipt & consumption of benefits of promised goods/services” by customer.
5 steps to account for revenue
- Indentify contract(s) with the customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price( across various performance obligation)*
- Recognize revenue when a performance obligation is satisfied
*A single contract may contain more than one performance obligations for ex. Supply of goods as well as rendering of services.
As the subject is new, comments are heartily invited.
(Author can be reached @ arpit.arora@icai.org or +91983458778)
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