The Complete IFRS 15 Revenue Recognition Cornerstone

Last Updated on 01/10/2025 by 75385885

The Complete IFRS 15 Revenue Guide – Introduction: Why Revenue Recognition Matters

Revenue is often the single most important line in a company’s financial statements. It reflects not only the volume of goods or services sold but also the company’s ability to generate value for its stakeholders. Analysts, investors, regulators, and boards rely on revenue figures as the foundation for profitability measures such as gross margin, EBITDA, and net income.

Before 2018, revenue recognition under IFRS was fragmented across several standards and industry-specific rules (IAS 18, IAS 11, and various interpretations). This patchwork created inconsistencies across industries and reduced comparability between companies. With IFRS 15 Revenue from Contracts with Customers, the International Accounting Standards Board (IASB) introduced a single, comprehensive framework to recognize revenue.

The heart of this standard is the 5-step model, which provides a principles-based approach to deciding when and how much revenue should be recognized. This cornerstone article explains the model, explores its scope and related guidance, and connects IFRS 15 to other IFRS standards such as IFRS 9, IFRS 16, and IFRS 17.

---

Combine IFRS 15 items with the IFRS 9 ECL-model

At the center of IFRS 15 lies the 5-step model, a structured process that ensures revenue is recognized consistently and transparently. The IASB designed this model to be applied across industries and geographies, ensuring a high degree of comparability between companies.

An important link exists between IFRS 15 and IFRS 9 Financial Instruments. While IFRS 15 defines when and how revenue is recognized, the related trade receivables and contract assets are subject to the Expected Credit Loss (ECL) model of IFRS 9. This means that receivables and contract assets must be presented net of expected losses, combining recognition principles from IFRS 15 with impairment requirements from IFRS 9.

The table below illustrates the structure of IFRS 15 and shows how each step connects with broader application issues — including the interaction with IFRS 9’s ECL model for financial assets.

Read the full IFRS 15 text here on ifrs.org: IFRS 15 Revenue from Contracts with Customers

---

Step 1 – Identify the Contract

Revenue recognition begins with determining whether a valid contract exists. A contract is an agreement between two or more parties that creates enforceable rights and obligations. Under IFRS 15, the contract must meet five criteria: approval, rights, payment terms, commercial substance, and collect-ability.

For most companies, a “contract” seems obvious — but in practice, identifying enforceable rights and obligations can be tricky. Take Apple: when it sells an iPhone to a telecom provider like AT&T, there may be a bundle of services (device + monthly plan + warranty).

The contract has to be clear: what are the performance obligations, who is paying whom, and what happens if the customer defaults? Similarly, Tesla signing a fleet deal with Hertz isn’t just a sale of cars — it includes charging infrastructure, software updates, and sometimes insurance elements. IFRS 15 requires firms to establish whether a valid contract exists (payment terms, commercial substance, collectability) before any revenue can be recognized.

→ For a detailed discussion, see: Identify the Contract

Step 2 – Identify the Performance Obligations

Performance obligations are promises to deliver distinct goods or services. Companies must carefully evaluate whether goods or services are distinct on their own or must be bundled together. Errors in the identification at this stage can distort the timing of revenue recognition.

Once a contract is in place, companies must figure out what distinct goods or services are promised. This is where Amazon Web Services (AWS) provides a classic example: one cloud contract can include computing power, data storage, security add-ons, and training. Each of those may be distinct performance obligations.

In the pharma world, Pfizer might promise not just delivery of a drug, but also regulatory support and ongoing research updates. Misidentifying obligations can either overstate or understate revenue timing. IFRS 15 pushes management to unbundle complex contracts so that each component is accounted for fairly.

→ For details, see: Performance Obligations

Step 3 – Determine the Transaction Price

The transaction price is the amount of consideration expected in exchange for goods or services. This step requires judgment in handling variable consideration, significant financing components, and non-cash payments.

This is where the art meets the science. Airbus or Boeing often enter into aircraft deals with discounts, rebates, or escalation clauses linked to fuel efficiency or delivery schedules. The “transaction price” is rarely just the sticker price.

For Netflix, a transaction price might involve bundled content, free trial discounts, or regional pricing. IFRS 15 requires companies to estimate variable consideration and adjust for things like financing or non-cash payments. For instance, Microsoft may accept advertising credits as partial payment in certain arrangements — these must be valued and included in the transaction price.

→ See: Transaction Price

Step 4 – Allocate the Transaction Price

If a contract has multiple performance obligations, the transaction price must be allocated based on relative stand-alone selling prices. Adjustments may be required for discounts or variable elements tied to specific obligations.

When a contract covers multiple obligations, the agreed price has to be split across them. Think of Apple again: an iPhone bundled with one year of iCloud storage. The total price isn’t all for the phone; a portion must be allocated to the cloud service. IFRS 15 requires allocation based on relative stand-alone selling prices.

In media, Disney might license a package of movies to a streaming service like Netflix — the transaction price has to be allocated fairly between blockbuster titles and less valuable content. This avoids inflating revenue upfront and ensures recognition matches actual delivery of value.

See: Allocate the Transaction Price

Step 5 – Recognize the Revenue

Revenue is recognized when control of a good or service passes to the customer, not merely when risks and rewards are transferred. This can occur over time (e.g., construction contracts) or at a point in time (e.g., retail sales).

Finally, revenue is recognized either over time or at a point in time. For Siemens building a power plant, revenue is recognized progressively as milestones are met — investors expect to see revenue grow in line with project completion.

For a retailer like Zara (Inditex Group), revenue is recognized at the point of sale when control of the clothing passes to the customer. For Microsoft 365, subscriptions are recognized over time as services are delivered. This step is the heart of IFRS 15 — aligning revenue recognition with the actual transfer of control to the customer, not just the signing of a contract or receipt of cash.

→ See: Recognize the Revenue

Raed here how the IFRS foundation sets the IFRS™ Standards.

IFRS 15 Other Recognition and Measurement Guidance

While the 5-step model is the backbone, IFRS 15 also provides further guidance for specific situations:

Contract Costs

Incremental costs of obtaining a contract (such as sales commissions) should be capitalized if expected to be recovered. Similarly, certain costs of fulfilling a contract may also be recognized as assets.

Think of the salesforce at Salesforce, Oracle, or IBM who negotiate large, multi-year software contracts. The commissions they earn are not simply an expense of the period; under IFRS 15 these incremental costs must be capitalized if they are expected to be recovered through future revenue.

This prevents an artificial dip in profit margins in the year the deal is signed. Similarly, companies like Pfizer or Novartis incur significant clinical trial costs to fulfill development agreements with partners. Where those costs directly relate to specific contracts and are recoverable, they too can be recognized as assets. For investors, this treatment smooths earnings and gives a fairer picture of the economics of long-term deals.

→ See: Contract costs

Contract Modifications

Changes in scope or price of a contract must be assessed carefully. Modifications can be treated as new contracts or adjustments to the existing contract, depending on the circumstances.

Large infrastructure players such as Siemens, General Electric, or Bechtel often sign multi-billion contracts that evolve over time: additional turbines, design changes, or new project phases. Each change in scope or price is a contract modification that must be assessed carefully. Under IFRS 15, some modifications are treated as separate new contracts (with new performance obligations), while others adjust the existing contract (with catch-up or prospective revenue effects).

Getting this wrong could materially change reported revenue. For example, Airbus might sell an airline 50 aircraft and later agree to add 10 more — whether that is a new contract or a modification determines when revenue is recognized, and thus impacts both revenue timing and profit recognition.

→ See: Contract Modifications

Licensing

Licensing arrangements, especially in technology, media, and pharmaceuticals, require special consideration. Revenue may be recognized either over time or at a point in time, depending on whether the license provides access to or use of intellectual property.

The world’s largest content and IP holders — think Disney, Netflix, Microsoft, or AstraZeneca — live and breathe licensing. A film studio licensing a movie franchise to a streaming platform is different from a pharmaceutical company granting rights to use a patented drug.

IFRS 15 distinguishes between licenses that provide access over time (e.g. Disney licensing Marvel content to Netflix on a rolling basis) and those that grant right-to-use IP at a point in time (e.g. a one-time transfer of rights to a generic manufacturer).

Misjudging this distinction can shift billions of revenue between reporting periods. For tech giants and pharma companies, the timing of licensing revenue is as critical as the cash flow itself.

→ See: Licensing

Other Application Issues

Other aspects addressed include variable consideration, non-cash consideration, consideration payable to a customer, and the effect of significant financing components.

Other practical matters are equally important for companies worldwide:

• Variable consideration: Retailers like Amazon or Walmart must estimate returns, rebates, or loyalty program redemptions when recording revenue.
• Non-cash consideration: Tech companies like Apple sometimes receive advertising credits or bundled items instead of cash.
• Consideration payable to customers: Beverage giants like Coca-Cola or Heineken pay slotting fees to supermarkets — these reduce transaction price, not marketing expense.
• Significant financing components: In industries such as construction (Hochtief, Fluor) or telecom (Vodafone, AT&T), customers may prepay or defer payments over years, requiring revenue to be adjusted for the time value of money.

These “other” elements might look technical, but they often drive big real-world differences in reported revenue. For a CFO, overlooking them could mean explaining sudden swings in earnings to analysts — not a comfortable position.

---

IFRS 15 Presentation and Disclosure

Presentation

• Contract assets: rights to consideration for goods or services already transferred, conditional on something other than the passage of time.
• Receivables: unconditional rights to consideration (measured under IFRS 9).
• Contract liabilities: obligations to transfer goods or services for which consideration has been received.

Disclosure

Entities must provide comprehensive information to help users understand revenue and cash flows. This includes:

• Dis-aggregation of revenue into meaningful categories.
• Significant judgments and estimates.
• Information about performance obligations, transaction prices allocated to remaining obligations, and when revenue will be recognized.

---

IFRS 9 Expected Credit losses Model

There is one impairment model under IFRS 9 (ECL). But there are three different applications of that model depending on the asset type:

General approach

Applies to most financial assets measured at amortized cost or at fair value through other comprehensive income (FVOCI).

Uses the three-stage model:

• Stage 1: At initial recognition → 12-month ECL recognized.
• Stage 2: If credit risk has increased significantly → lifetime ECL recognized.
• Stage 3: For credit-impaired assets → lifetime ECL, with interest income based on net carrying amount.

→ See: General approach

Simplified approach

Mandatory for trade receivables, contract assets, and lease receivables (with some options).

Entities recognize lifetime ECLs from day one (no staging i.e. Stage 1 → Stage 2 → Stage 3, no 12-month step at initial regognition).

Typically implemented with provision matrices based on historical loss rates adjusted for forward-looking information.

→ See: Simplified approach

Purchased or Originated Credit-Impaired (POCI) Assets

Applies to assets that are already credit-impaired at initial recognition (= at the moment a company first acquired it and started recording it).

Lifetime ECLs are always recognized through adjustment of credit-adjusted effective interest rate (no staging i.e. the normal process of Stage 1 → Stage 2 → Stage 3). The bank sets a credit-adjusted EIR at purchase. Interest revenue is recognised using this EIR, applied to the amortised cost (which already reflects expected credit losses).

→ See: Purchased or Originated Credit-Impaired (POCI) Assets

---

How IFRS 15 Connects With Other Standards

IFRS 9 – Financial Instruments

Once a contract creates a receivable or contract asset, its subsequent measurement is governed by IFRS 9, not IFRS 15. Under IFRS 9, receivables and contract assets are subject to the expected credit loss (ECL) model, requiring companies to recognize impairments based on forward-looking information. This means that although IFRS 15 determines the timing and amount of initial revenue, IFRS 9 determines whether that revenue will ultimately be collected in cash.

→ See: IFRS 9 – Financial Instruments

IFRS 16 – Leases

Revenue from leases falls outside IFRS 15. Lessors account for lease income under IFRS 16, while lessees recognize right-of-use assets and lease liabilities.

→ See: IFRS 16 – Leases

IFRS 17 – Insurance Contracts

Insurance contracts are excluded from IFRS 15. Instead, IFRS 17 provides a distinct measurement model reflecting the unique risks of insurance arrangements.

→ See: IFRS 17 – Insurance Contracts

IFRS 3 – Business Combinations

When acquiring a business, contracts are measured at fair value. Entities must determine whether contracts represent favorable or unfavorable terms under IFRS 3, with revenue recognition continuing under IFRS 15 post-acquisition.

→ See: IFRS 3 – Business Combinations

The Complete IFRS 15 Revenue Guide The Complete IFRS 15 5-Step Model Cornerstone The Complete IFRS 15 Revenue Recognition Cornerstone

The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide

---

Why IFRS 15 Matters for Governance and Stakeholders

Revenue recognition is not just a technical accounting exercise — it has major governance and oversight implications:

• Performance measurement: Revenue drives KPIs and investor expectations.
• Audit committee oversight: Boards must understand how judgments in IFRS 15 affect reported results.
• Investor communication: Clear disclosure helps maintain trust with stakeholders.
• Comparability: IFRS 15 ensures entities across industries apply consistent principles.
• Risk management: Linking IFRS 15 with IFRS 9 ensures that recognition is not divorced from collectability.

---

Conclusion

IFRS 15 represents a landmark in financial reporting, introducing a single global framework for revenue recognition. At its core is the 5-step model, supported by additional guidance on contract costs, modifications, licensing, and disclosures.

But revenue recognition does not stand alone. IFRS 15 interacts closely with other standards — most importantly IFRS 9 for receivables and contract assets, IFRS 16 for leases, and IFRS 17 for insurance contracts.

Understanding these connections is crucial for preparers, auditors, boards, and investors. Only by viewing IFRS 15 within the broader IFRS ecosystem can stakeholders appreciate its role in ensuring faithful representation of performance and financial health.

Scope of IFRS 15

IFRS 15 applies to all contracts with customers, except:

• Leases (IFRS 16)
• Insurance contracts (IFRS 17)
• Financial instruments and other contractual rights/obligations (IFRS 9, IFRS 10, IFRS 11, IAS 27, IAS 28)
• Non-monetary exchanges between entities in the same line of business

The scope definition ensures clarity about when IFRS 15 should apply and when companies must turn to other standards.

FAQs on IFRS 15

The Complete IFRS 15 Revenue Guide

The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide The Complete IFRS 15 Revenue Guide