The International Financial Reporting Standards (IFRS) and
the International Accounting Standards (IAS) serve as a conceptual framework
for accounting for the activities of enterprises and the preparation and
presentation of financial statements for their reports. Their treatments are
subject to discussions with a practical application nature to improve the
accounting of businesses transactions, and processes arising from the business
of the enterprises. The number of standards are constantly changing due to the re-evaluation
of current standards being discussed or replacing old ones, which is apparent
with IAS 18 and IFRS 15. This is so that there is unity in the comparability of
the information received from the financial statements between different
entities. This is the core principle of convergence. Convergence of accounting
standards ‘is the process of harmonising
accounting standards issued by different regulatory bodies’ (CIMA, pg.3,
2006). Some of the main principles in accounting are for financial
information or reporting to have clear transparency, credibility and
compatibility, and so in doing, this convergence of world-wide accounting
standards makes them easily accessible, applicable and user-friendly.


The main aim of this paper is to discuss the differences
between the criteria for revenue recognition in IAS 18 Revenue and IFRS 15
Revenue from Contracts with Customer, which is to be enforced from the 1st
January 2018. Revenue is seen as one of the most important measure to asses a
company’s performance and prospects as the essence of profitability is revenue,
which ensures business attain efficiency, profitability and sustainable success
(Siddiqui, 2015), which is why it is one of the first few figures a shareholder
is going to look at (PWC, 2017). Revenue therefore is defined as ‘the gross
inflow of economic benefits arising from the ordinary operating activities of
an entity’ (IAS 18.7). With there being such reliance on the revenue figure,
IFRS 15 is being introduced to help clear up the difficulties within IAS 18,
which will be explained later.

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On the 1st January 2018, companies will have to
adopt IFRS 15 Revenue from Contracts with Customers. The main reason for the
change was that the current revenue recognition standard IAS 18 and IAS 11
included lots of complex and detailed recognition requirements that where
industry specific and also some of the information was contradicting. The new
standard will also replace IFRIC 13, IFRIC 15, IFRIC 18 and SIC-31 (PWC, 2017).

The International Accounting Standards Board (IASB)- Financial Accounting Standards
Board (FASB) convergence project is a project aimed to eliminate a variety of
differences between the IFRS and the US GAAP (IAS plus, 2017). The introduction
of IFRS 15 and ASC 606 is a major achievement as it is starting to close the
gap between the differences in standards in the UK and America, as now for
revenue recognition they are all under a principle based standard instead of a
rule based standard. Therefore, if someone Is comparing a UK listed company
with a US listed company, the financial statements will be more comparable as
similar standards have been applied. (PWC, 2017).


Recognition is defined as ‘incorporating an item that meets
the revenue definition in the income statement when it meets the following
criteria’ (IASplus)

Probable that any future economic benefit
associated with the item of revenue will flow to the entity

The amount of revenue can be measured with
reliably (IAS plus, 2017 new link, do citation)

IAS 18 requires revenue to be recognised at the fair value
of consideration received or receivable. IAS 18 provides criteria for the
recognition of revenue arising from the following 3 activities, sale of goods,
rendering of services and interest, royalties and dividends.


IFRS 15 has a clear 5 step model which companies must follow
in order to comply with the standard:

Identify the contract(s) with customers

Identify the performance obligations in the

Determine the transaction price

Allocate the transaction price to the
performance obligations in the contract

Recognize revenue when (or as) a performance
obligation is satisfied

The current standard focuses on step 5, which leaves steps
1-4 lacking policy and clarity which has resulted in inconsistency (PWC, 2017).


IAS 18 was based around the transfer of risk and rewards
which can cause problems when a transaction involves both a good and service
related to that good. To determine when the risk and rewards of ownership have
been transferred, the entity could consider the transaction as a whole. This
can cause problems as the entity may still have a contractual obligation
remaining to the service of the good but they have already recognised all the
revenue. For example, if someone bought a mobile phone and it had 1 years’
warranty. Under the current standard there is no specific guidance on how to
account for warranties, therefore the revenue wouldn’t represent the pattern of
the transfer to the customer of all the goods and services in the contract
(Putra, 2010).  Within IFRS 15 they have
now incorporated accounting for warranties in their standard. It distinguishes
between a warranty providing assurance and a warranty providing additional
service (Navarro Amper & Co, 2014). For a recommendation, business should
get additional direction on the identification and separation of warranty


IAS 18 says that you should apply the
‘recognition criteria to the separately identifiable components of a single
transaction’ (M.,2017), however it does not give any guidance on how to
identify these components and how to allocate the selling price. When identifying
individual obligations in the contract IAS 18 only specifies the criteria for
sale of goods, rendering of services and interest, royalties and dividends,
which are usually applied separately for each transaction. However, there is no
clear criteria as to which components are separate and should be reported as
such. This then meant it was down to individuals or companies own
interpretation to best show how much revenue is to be recognised. For example,
because of this some products that come free when you sign up to services are
not apportioned to be included in the revenue, instead they are treated as cost
of acquiring the customer. The criteria for the following are:


Sale of goods (IAS 18.14)

Revenue is recognised if the definition for revenue and
recognition, as stated previously, are both met and that the all the risks and
rewards of the goods must be transferred to the buyer and the seller no longer
has any control over them. 


Rendering of services (IAS 18.20)

Revenue arising from rendering of services should be
recognised in relation to the stage of completion using the
percentage-of-completion method. A good example are service contracts which
span over a few years, so the revenue recognised should be proportionate to the
costs used.


Interest, Royalties and Dividends (IAS 18.29-30)

For all 3 it must be probable that the economic benefits
will flow to the enterprise and that revenue can be measured reliably, revenue
should be recognised for the following as:

Interest: using the effective interest method
outlines In IAS 39

Royalties: on accruals basis

Dividends: when the shareholder’s right to
receive payment is established


(Differencebetween, 2017) & (PFK, 2017), (Deloitte IAS
plus, 2017).


IFRS 15 has a wider scope as it accounts for revenue that
arises from contracts with customers, whereas IAS 18 just accounts for the 3
stated above (Navarro Amper & Co, 2014).


Here is where the need for the new standard
really shows. After identifying the contract, you must also identify the performance
obligation which is ‘a promise in a contract with a customer to transfer a good
or service to the customer’ (PWC, 2017). If the good or services are distinct
then the promises are performance obligations and accounted for separately.

Distinct means that the owner can benefit from the goods or services on its own
or together with another resource and that the entity’s promise to transfer the
goods or services to the customer is separately identifiable from the other
promise in the contract. By having clear definitions, which IAS 18 lacked, it helps
the user of the standard when dealing with complex business transactions. Once
the transaction price has been determined it is then allocated to each
performance obligation in an ‘amount that depicts the amount of consideration
for transferring the promised goods or services’ (IFRS Box, 2017).  The main part of IFRS 15 is that an asset is
transferred when the customer obtains control of said asset. Within step 5,
IFRS 15 has introduced 2 new concepts; that a performance obligation can be
satisfied over time or at a point in time.

the performance obligation to be satisfied over time it must meet one of the
following criteria (IFRS 15.35): (CBH, 2017)

·      Customers
simultaneously receives and consumes benefits as the seller performs

·      Customer
controls assets as it is created or enhanced by the seller

·      The asset
created by the seller has no alternative use to the seller and the seller has
an enforceable

the performance obligation cannot be satisfied over time then it will be at a
point in time. Revenue is then recognised when the control is transferred at a
certain point in time (Deloitte IAS plus, 2017). Within IFRS 15.38, it details
the factors that could indicate the point in time when control is transferred.

The main difference about the timing of revenue here is that IAS 18 is about
the transfer of risk and rewards whereas IFRS 15 deals with when the control of
the goods or services are transferred to the customer.


IFRS 15 has been bought it to try and tackle the issued that
arose from IAS 18 and to bridge the gap between the IFRS and US GAAP. Companies
face big challenges with the implementation of the standard, as they will have to
review a number of processes. Companies can approach it in two ways; a full
retrospective approach or a modified retrospective. The full retrospective
means the financials two years prior are converted to the new standard and the
modified approach means you do not apply the new standard to any previous
years, but must include the disclosure of the year
of adoption financials under the old standards (Smith, 2017).


One company that has already applied the new standard is
Capita. Looking at the table below you can see that there has been a big impact
to their finances once they implemented IFRS 15. Except for the cash flow
staying the same, there was a change in figures to everything else. They said
that reduction in underlying revenue was due to ‘three fifths of it down to the
re-profiling of long-term contracted revenue’ (Capita, 2017). Another reason
was due to the move from principle to agent basis of revenue recognition.

(Capita, pg.4, 2017)




industry that is going to see an impact in the change to IFRS 15 are the
airline companies. Some of the key areas that will be effected for them are how
they account for loyalty benefits and mileage credit, to new disclosures of
information. Like all companies, they will have to have strong controls in
place to insure the implementation of the new standard goes well. Loyalty
programs are hugely popular with airlines as it encourages users to continue to
fly with them. EasyJet has the easyJet Flight Club scheme which rewards their
most frequent flyers. ‘The mileage credits provide the customer to material
rights they wouldn’t normally receive unless they had signed up to the scheme’
(EY, pg.2, 2017). Therefore, this classifies as the performance obligations for
revenue recognition. Following the 5-step approach the airlines must then ‘allocate
a portion of the transaction price to the mileage credits and defer revenue
recognition until the future goods or services are used’ (EY, pg.2, 2017). To
ensure that they comply with the new standard IFRS 15 they need to make sure
that their method of estimating the standalone selling price is appropriate (EY,


Overall the new standard will have different
impacts for certain industries, but in general IFRS 15 should help clear up any
inconsistencies there was with IAS 18. With the complex nature of business
transactions these days, IFRS 15 is trying to allow for uniformity in
recognizing all types of revenue. 

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