ACCA Applied Skills · Financial Reporting
IFRS 15 Revenue for ACCA Financial Reporting
Revenue is income from contracts with customers, accounted for under IFRS 15. You apply five steps: identify the contract, identify performance obligations, determine the transaction price, allocate it to the obligations, and recognise revenue when or as each obligation is satisfied. Work through them in order on every question.
What this chapter covers
This chapter covers IFRS 15 Revenue from Contracts with Customers. The standard gives one model for all contracts with customers. You break a contract into distinct promises, price each one, and record revenue as control of the goods or services passes to the customer.
The chapter builds in layers. First you learn the five-step model. Then you study each step in detail: what counts as a contract, how to split performance obligations, how to handle variable consideration and discounts, and how to decide between over time and point in time. After that come the special situations: principal versus agent, warranties, rights of return, licences, and contract costs and balances.
Revenue links to the rest of FR. It feeds the statement of profit or loss and the statement of financial position (receivables, contract assets and contract liabilities). It appears in the single-entity financial statements question, in group accounts where intragroup sales are eliminated, and in interpretation questions. It also overlaps with inventory, leases (sale and leaseback) and financial instruments (receivables).
Revenue is the top line of every set of financial statements, so examiners return to it often. It can appear as Section A objective questions, as a Section B scenario with five questions, and as an adjustment inside a Section C constructed-response question. The objective questions are marked all or nothing, so you need precise rules, not a general feel. The calculations are short and repeatable once you follow the five steps, which makes this a reliable chapter to turn into marks with focused practice.
Revenue: topics in the order to study them
- 1IFRS 15 Five-Step Revenue ModelIt is the framework every other topic hangs on, so learn the five steps and their order first.
- 2Identifying Contracts and Performance ObligationsSteps 1 and 2 come first in any question, and you cannot price or time revenue until you know what is being sold.
- 3Transaction Price and AllocationSteps 3 and 4 need the obligations from the previous topic and give you the amounts to recognise.
- 4Recognising Revenue Over Time or at a Point in TimeStep 5 uses the allocated amounts and is the most tested part, including progress measurement.
- 5Principal versus AgentOnce the core model is secure, this decides whether you report revenue gross or only the commission.
- 6Specific Transactions: Warranties, Rights of Return and LicencesThese apply the model to particular situations, so they make sense only after the core steps are clear.
- 7Contract Costs and Contract BalancesThis finishes the topic by covering costs to obtain or fulfil a contract and the statement of financial position items, which needs all earlier ideas.
How to prepare Revenue
Aim to be able to run the five steps from memory, then apply them to short scenarios quickly and accurately.
- Write the five steps on one page and recite them until you can do it without looking.
- Study steps 1 and 2 with short examples: decide whether a promise is distinct, and whether goods or services are bundled or separate.
- Practise step 3 and 4 calculations: variable consideration, discounts, and allocation by relative stand-alone selling prices. Check that allocated amounts add up to the transaction price.
- Drill the over-time test: customer receives and consumes the benefit, customer controls the asset as it is created, or no alternative use plus a right to payment. If none applies, recognise at a point in time.
- Work through principal versus agent, warranties, returns and licences using one scenario each, and write the one-line rule that decides the treatment.
- Practise Section A and Section B style objective questions on the whole chapter, then write full answers to a constructed-response question that includes a long-term contract and the related statement of financial position balances.
- Review every error in a log and redo those questions a few days later.
Common mistakes in Revenue
Treating bundled goods and services as one item when they are distinct.
Fix: Ask whether each promise could be bought separately and is separately identifiable. If yes, treat it as its own performance obligation and allocate the price.
Allocating a discount equally or to the wrong item.
Fix: Use relative stand-alone selling prices. Compute each share as SSP ÷ total SSP × transaction price, then check the shares add up to the total.
Recognising revenue over time when none of the three criteria is met.
Fix: Test the criteria explicitly. If none is met, revenue is recognised at the point when control passes.
Reporting gross revenue when the entity is only an agent.
Fix: Check who controls the item before it reaches the customer, who bears inventory risk and who sets the price. An agent shows only its commission.
Mixing up contract assets, contract liabilities and receivables.
Fix: A receivable is an unconditional right to payment. A contract asset is revenue earned but still conditional on something other than time. A contract liability is cash received or due before the entity has performed.
Choosing an answer in an objective question from a general rule without checking the scenario facts.
Fix: Underline the facts that decide the step being tested, apply the exact rule, and eliminate options that break it before choosing.
Last-day revision: Revenue
- The five steps: contract, performance obligations, transaction price, allocation, recognise revenue.
- Revenue is recognised when or as a performance obligation is satisfied, meaning control passes to the customer.
- A good or service is a separate performance obligation if it is distinct: the customer can benefit from it and it is separately identifiable in the contract.
- Allocate the transaction price in proportion to stand-alone selling prices.
- Variable consideration is included only to the extent a significant reversal of revenue is highly unlikely.
- Over time applies if one of three criteria is met; otherwise revenue is recognised at a point in time.
- For over-time revenue, use a reasonable progress measure such as costs incurred to total expected costs, or output.
- A principal controls the goods or service before transfer and reports gross revenue; an agent reports only its fee or commission.
- A standard warranty is accounted for under IAS 37; a warranty sold separately or giving extra service is a separate performance obligation.
- For sales with a right of return, recognise revenue only for items expected not to be returned, with a refund liability and a returned-goods asset.
- A contract asset is a right to consideration not yet unconditional; a contract liability is an obligation where payment came before performance.
- Incremental costs of obtaining a contract are capitalised if expected to be recovered, and amortised as the related revenue is recognised.
Revenue practice questions
- Under IFRS 15, which of the following costs must be expensed as incurred when accounting for a contract with a customer?
- Brightwell Co sells a software licence together with a one-year technical support service for a total of $120,000. The stand-alone selling p…
- Kestrel Co sells a machine to a customer for $90,000 and, in the same contract, agrees to install it. The installation is simple, requires n…
- Kano Co sells a 2-year service plan on 1 October 20X1 for $24,000, paid in advance, with services provided evenly. Kano also incurred $3,000…
- Brill Co provides a 4-year managed IT service for $400,000, with services delivered evenly. Before service starts, Brill spends $60,000 on s…
- Oakfield Co agrees to build a specialised processing unit to a customer's design on the customer's land. Under the contract, Oakfield cannot…
- Dunmore Co enters into a contract with a customer on 1 March. The customer has signed, the goods have been identified and payment terms agre…
- Larch Co sells a printer to a customer and also grants a right to buy ink cartridges in future at a 40% discount, which is a discount the cu…
Revenue in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Revenue: frequently asked questions
Is revenue examined in Section C of the FR exam?
It can be. Revenue often appears as an adjustment within a single-entity or group question, and it also appears in Section A and Section B objective questions. Be ready to calculate amounts and also explain treatment briefly.
What is the quickest way to decide between over time and point in time?
Check the three over-time criteria in order. If the customer simultaneously receives and consumes the benefit, controls the asset as it is built, or the asset has no alternative use and you have an enforceable right to payment for work done, recognise over time. If none applies, recognise at the point control passes.
How do I allocate the transaction price?
Find the stand-alone selling price of each performance obligation. Share the transaction price in proportion to those prices. Each share equals the item's SSP divided by the total of all SSPs, multiplied by the transaction price.
How do I tell a principal from an agent?
Ask whether the entity controls the good or service before it is transferred to the customer. Indicators include primary responsibility for fulfilment, inventory risk and discretion over price. If it does not control it, it is an agent and records only its fee.