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Main Provisions under Revenue Recognition

Posted on March 9th, 2017 by Sanjit Anand ||Email This Post Email This Post

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Revenue is one of the most important key performance indicators (KPIs) used by investors when assessing a company’s performance and prospects.

Revenue recognition represents one of the highest risks on financial statements, and it is one of the leading causes of restatements.

The core principle as stated in the IFRS is to:

“Recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to exchange for those goods or services.”

The five-step framework is the core structure of IFRS 15; it consist of the five different steps for revenue recognition
clasical steps 606

The guidance in this Update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts).

The new standard states that you cannot recognize revenue for billed revenue amounts associated with the billing amount until the performance obligation to the customer is satisfied.

  • For each performance obligation, an entity must apply consistent method of measuring the progress
  • Performance obligation is satisfied at a point in time or over time. This is the trigger to recognize the revenue.
  • Recognize Costs to obtain or fulfill the contract
  • Under disclosure requirements, qualitative and quantitative information is required about contracts, changes, transaction price, costs, etc.

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