CA Kamal Garg

1. Understanding the ethics of IFRS 15 (corresponding Ind AS 115):

IFRS 15 will replace the following standards and interpretations:

1. IAS 18 (AS 9) Revenue,

2. IAS 11 (AS 7) Construction Contracts

3. SIC 31 Revenue – Barter Transaction Involving Advertising Services

4. IFRIC 13 Customer Loyalty Programs

5. IFRIC 15 Agreements for the Construction of Real Estate and

6. IFRIC 18 Transfer of Assets from Customers

The core principle of IFRS 15 is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration (payment) to which the entity expects to be entitled in exchange for those goods or services. To apply this principle, a five-step model framework as described below is required to be followed.

1.1. Five-Step Model Framework

Every entity must follow the five-step model in order to comply with IFRS 15. That is:

  • Step 1: Identify the contract(s) with a customer: IFRS 15 defines a contractas an agreement between two or more parties that creates enforceable rights and obligations and sets out the criteria for every contract that must be met.
  • Step 2: Identify the performance obligations in the contract:performance obligationis a promise in a contract with a customer to transfer a good or service to the customer.
  • Step 3: Determine the transaction price: The transaction priceis the amount of consideration (for example, payment) 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.
  • Step 4: Allocate the transaction price to the performance obligations in the contract: For a contract that has more than one performance obligation, an entity should allocate the transaction price to each performance obligationin an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for satisfying each performance obligation.
  • Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

2.2. Who Will Feel the Biggest Impact of IFRS 15

In author’s opinion the most impacted industries are telecom, software development, real estate and other industries with long-term contracts. If an entity belongs to an industry where bundled contracts of “product and service” are quite common, then IFRS 15 principles must be carefully and meticulously threaded by them.

2.3. Illustrating the impact of IFRS 15 vis-à-vis AS 9: Let’s thread the IFRS 15 ethics by referring to an entity in telecommunications sector, where customers usually buy a prepayment plans with a handset. Under the new model of revenue recognition under IFRS 15, companies in telecom will probably recognize revenue earlier than under older versions of revenue recognition principles (i.e. AS 9, AS 7 and allied standards).

It is so because under new IFRS 15, the transaction price must be allocated to the individual performance obligations in the contract and recognized when these obligations are delivered or fulfilled. It means that under new IFRS 15, telecom operator must allocate a part of the revenue from prepayment plan with free handset to the sale of handset, too.

Under AS 9, the revenue is defined as a gross inflow of economic benefits arising from ordinary operating activities of an entity. It means that if the operator gives a handset for free with the prepayment plan, then the revenue from handset is Nil (i.e. zero).

To illustrate: Mr. X enters into a 12-month telecom plan with the local mobile operator ABC. The terms of plan are as follows:

1. X monthly fixed fee is Rs. 100.

2. X receives a free handset at the inception of the plan.

ABC sells the same handsets for Rs. 300 and the same monthly prepayment plans without handset for Rs. 80 per month. A question no arises as to how should ABC recognize the revenues from this plan in line with AS 9 and IFRS 15?

Revenue under AS 9: Extant principles of AS 9 states that ABC should apply the recognition criteria to the separately identifiable components of a single transaction (here: handset + monthly plan). However, AS 9 does not give any guidance on how to identify these components and how to allocate selling price and as a result, there were different practices applied. For instance, telecom companies recognized revenue from the sale of monthly plans in full as the service was provided, and no revenue for handset – they treated the cost of handset as the cost of acquiring the customer.

Some companies identified these components, but then limited the revenue allocated to the sale of handset to the amount received from customer (zero in this case). For the simplicity, let’s assume that ABC recognizes no revenue from the sale of handset, because ABC gives it away for free. The cost of handset is recognized to profit or loss and effectively, ABC treats that as a cost of acquiring new customer. Revenue from monthly plan is recognized on a monthly basis. The journal entry is to debit receivables or cash and credit revenues with Rs. 100.

Revenue under IFRS 15: Under new principles of IFRS 15, ABC needs to identify the contract first (step 1), which is obvious here as there’s a clear 12-month plan with Mr. X.

Then, ABC needs to identify all performance obligations from the contract with Johnny (step 2 in a 5-step model):

  1. Obligation to deliver a handset
  2. Obligation to deliver network services over 1 year

The transaction price (step 3) is Rs. 1,200, calculated as monthly fee of Rs. 100 (x) 12 months. Now, ABC needs to allocate that transaction price of Rs. 1,200 to individual performance obligations under the contract based on their relative stand-alone selling prices (or their estimates) – this is step 4.


Performance obligation Stand-alone
selling price
% on total Revenue (relative selling price = 1,200 x %)
Handset 300.00 23.80% 285.60
Network services 960.00 (80 x12) 76.20% 914.40
Total 1,260.00 100.00% 1,200.00

The step 5 is to recognize the revenue when ABC satisfies the performance obligations. Therefore:

  1. When ABC gives a handset to Mr. X, it needs to recognize the revenue of Rs. 285.60;
  2. When ABC provides network services to Mr. X, it needs to recognize the total revenue of Rs. 914.40.

The journal entries are summarized in the following table:

Description Amount Debit Credit When
Sale of handset 285.60 FP – Unbilled revenue P/L – Revenue from sale of goods When handset is given to Mr. X
Network services 100.00 (monthly billing to Johnny) FP – Receivable to Johnny When network services are provided; on a monthly basis according to contract with Mr. X
76.20 (914.40/12) P/L – Revenue from network services
23.80 (285.60/12) FP – Unbilled revenue

So as it can be observed that Mr. X effectively pays not only for network services, but also for his handset.

2.4. What’s the Impact of the IFRS 15?

The biggest impact of the new standard is that the companies will report profits in a different way and profit reporting patterns will change. In our telecom example, ABC reported loss in the beginning of the contract and then steady profits under AS 9, because they recognized the revenue in line with the invoicing to customers. Under IFRS 15, ABC’s reported profits are the same in total, but their pattern over time is different.

2.4.1. How does it matter: Some contracts surpass one accounting period. They are long-term and reporting revenues in incorrect accounting periods might cause wrong taxation, different reporting to stock exchange and other things, too. To illustrate further, let’s say that contract started on 1 July 20X1 and ABC’s financial year-end is 31 December 20X1. Just look how much profits ABC reports from the same contract with Mr. X under AS 9 and IFRS 15 in the year 20X1 (for a six months period):

Performance obligation Under AS 9 Under IFRS 15
Handset 0.00 285.60
Network services 600.00 (=100*6) 457.20 (=76.2*6)
Total 600.00 742.80

 The above article is contributed by CA Kamal Garg having professional and academic interests in IFRS, Accounts, Auditing and Corporate Laws arenas. He can be approached at [email protected]

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June 2021