Point in time revenue recognition

IFRS 15

IFRS 15 includes new and changed regulations on how to recognize revenue on contracts, where a contract is an agreement between a seller and a buyer.

The requirements for recognizing revenue apply to all contracts with customers, except for lease contracts (IAS 17), insurance contracts (IFRS 4), financial instruments (IFRS 9), and barter transactions between firms to meet customer demand. The contracts include Sales orders, Sales Schedules, Service orders, Maintenance Sales orders, and Contract Deliverables.

Before the IFRS 15 regulation was active, revenue was taken at the moment of invoicing. IFRS 15 requires revenue to be taken when the performance obligation has been met. Usually, the moment the performance obligation is met is equal to the moment of invoicing. But, depending on the details of the contractual agreement, these moments can differ. Also, the revenue amount can differ from the invoiced amount (transaction price).

According to the new IFRS rules for revenue recognition, revenue can be recognized in these steps:

1. Identify the contract
2. Identify performance obligations
3. Determine the transaction price
4. Allocate the transaction price
5. Recognize the revenue

Performance obligation

The performance obligation is a good or service delivered to the customer, per the contractual agreement. The performance obligation should be distinct, which means it can be consumed by the customer and the goods and services can be separately identified from other goods and services.

Based on the contractual agreement, the performance obligation can be different, although it concerns the same goods and services.

In LN terms, a performance obligation is, for example, a sales order line, service order line, or contract deliverable. A performance obligation can be fulfilled with the delivery of goods or services.

Timing of revenue recognition

If Point in Time Revenue Recognition is used, the timing of revenue recognition lays between the moment of starting the contractual agreement and the moment of closing the contract. The moment of revenue recognition is always explicitly stated in the contract.

The moment the performance obligation is fulfilled, depends on the contractual agreement. If revenue recognition is triggered by, for example, a shipment, a period after the shipment can be excluded from revenue recognition. For example, the performance obligation can include transportation of products to a certain location after shipment, or can require installation of license keys after a software delivery.

Bundling

Bundling in IFRS means that different activities or deliverables are bundled into one performance obligation. A typical example is the delivery of goods with a service to install the goods, or a training to use the goods.

Consequently, a difference exists between recognizing revenue for the performance obligation 'delivering a product', and ‘ensuring a working solution’. In both cases, goods are shipped, but in the latter case, revenue can be recognized only after confirmation of a working solution. In LN, the service or training can be maintained in Service, and the shipment of goods can originate from a sales order. The lines can be bundled using a Revenue Contact.

Bundling is also applicable for performance obligations that require a total quantity of goods to be delivered. For example, the performance obligation of a 'working car' is not met with the delivery of three tires, because four wheels are required.

Transaction pricing

The amount to be recognized is based on the sale amount. However, factors such as certainty of the performance obligation, or prudence of financially responsible employees, can affect the amount.

The amount can be modified during the process of recognizing revenue.