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.

1. Contract Modification

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.

2. Contract Asset

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.

3. Contract Liability

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.

4. Stand-Alone Selling Price (SSP)

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.