Issued in May 2014 and applicable from period starting on or after 1 January 2018.
In order to reduce the probability of earning manipulation and enhance the reliability of financial statement, it was utmost essential to shift the recognition of revenue from mere estimations and judgemental criterias to more robust and universal guidelines which can provide a widespread understanding and comparability among financial statement. Needless to specify here, that in the era of continuous and intensified earning manipulation, vitality of obligation based revenue recognition program is more than mere dependent on shift of risk and rewards. Earlier IAS 18 and IAS 11 left sufficient rooms for enhance results of the entity by demonstrating unviable basis for shift of risk and rewards. Such basis was followed by drastic surprises which led to clapses in entities and humongous losses to investors.
Scope
IFRS covers in ambit all contracts executed with the customers except for those covered under IAS 17, 27, 28 and IFRS 4, 9, 10, 11, 16. Any contract executed and precisely covered under the provisions of either of above-stated standards has been kept out of coverage of this standard.
Accounting Requirements
Central idea under this IFRS is revenue will be recognized once good and services referred thereto in the contract has been transferred and selling entity is entitled to receive the payment within the terms of agreement. In this mere shift of risk rewards has been replaced with settlement of performance obligations. This core theme has been brought in by inclusion of five-step model for revenue recognition, which is applicable to every individual contract rather than in general to category. Five-steps referred thereto are listed here below:
a) Identify Contract with customer;
b) identify performance obligation under the contract;
c) determination of transaction price;
d) allocate the transaction price to the performance obligation in the contract; and
e) recognize revenue when or as the entity satisfy the performance obligation.
Facts and circumstances specified in the contract with the customers will serve as basis for application of guidance and requires careful exercise of judgement.
Contract Costs
Ancillary costs associated with procurement of contracts such as agency fee can be capitalized subject to cost being avoidable in case, contract would not have been successfully obtained. Further, in case of associated amortization period for contract costs is not exceeding 12 months, such costs to be expenses out rather than capitalising.
Key elements to be looked before capitalising the contracts costs are outlines below:
a) Costs should be directly attributable to the contracts;
b) cost generates or enhance the resources of the entity, which will be utilized towards fulfillment of the performance obligations identified under the contact; and
c) costs are expected to be recovered.
The asset recognised should be amortized systematically towards the transfer of the goods and services, assets relates to.
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