IFRS 15: Key Accounting Terms Every Finance Professional Should Know

Navigating IFRS 15 Revenue from Contracts with Customers requires a solid grasp of its standardized terminology. To help finance and accounting professionals stay compliant, here is a breakdown of the essential accounting terms defined under the standard.

A contract modification is defined as a change in the scope or price (or both) of a contract that is approved by the parties to the contract.

  • It is commonly referred to in practice as a change order, variation, or an amendment.
  • Adjustments are only made when the modification creates new enforceable rights and obligations or changes existing ones.
  • Depending on whether added goods are distinct and priced at standalone selling prices, modifications are accounted for either prospectively or via a cumulative catch-up adjustment.

A contract asset represents an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditioned on something other than the passage of time, such as the entity’s future performance.

  • Unlike a standard accounts receivable, a contract asset depends on future performance rather than just the simple passage of time.
  • If a contract is modified and treated as a terminated/new contract, existing contract assets are carried forward rather than written off, subject to impairment reviews.

A contract liability is an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due).

  • It reflects advance payments or billings made by a customer before the corresponding performance obligations are satisfied.
  • As the entity transfers goods or services over time or at a point in time, the contract liability is derecognized and recognized as revenue.

The stand-alone selling price (SSP) is the price at which an entity would sell a promised good or service separately to a customer.

  • SSP serves as a critical benchmark when evaluating whether a contract modification adds distinct goods or services at their proper market value.
  • If added goods or services are priced commensurate with their standalone selling prices, the modification is accounted for as a separate contract.

Similar Posts

Leave a Reply

Your email address will not be published. Required fields are marked *