IFRS 15 in Practice: What We Still Get Wrong About Revenue Recognition

While the five-step model is well-known and understood, its practical application often reveals gaps in understanding, especially when contracts get complex or assumptions go unchecked.

In this article, we’ll walk through some of the most common missteps we’ve seen in practice, and how we can apply IFRS 15 more effectively and consistently.

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Misidentifying Performance Obligations

One of the most frequent issues is failing to properly identify distinct performance obligations. This often happens when contracts bundle goods and services together without clear separation.

Example: A software company sells a license, installation, and ongoing support. If these are treated as one obligation, revenue may be recognised too early. IFRS 15 requires us to assess whether each component is distinct and should be accounted for separately.

Tip: Always ask, ‘Would the customer benefit from this good or service on its own?’ If so, it’s likely a separate performance obligation exists. Revenue should then be recognised at the point in time or over the period when that obligation is satisfied.
For example:

• The software license might be recognised at a point in time (when control is transferred).
• The installation service might be recognised as it is performed.
• The ongoing support would be recognised over the period during which it is provided.

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Overlooking Variable Consideration

Variable considerations, such as discounts, rebates, penalties, and bonuses are often embedded in contracts, but not always captured in revenue estimates. IFRS 15 requires entities to estimate variable consideration using either the expected value or most likely amount.

Example: A construction firm that enters into a contractual obligation which includes a performance bonus tied to early completion.

Tip: Document assumptions and update them regularly. If it is likely that the project will be completed early, then the bonus needs to be factored into the revenue figure.

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Treating Disclosures as an Afterthought

Disclosures under IFRS 15 are extensive, and for good reason. They help users understand how revenue is generated, the timing of cash flows, and the risks involved.

Yet many companies still treat disclosures as a compliance checklist rather than a communication tool.

Tip: Use disclosures to tell the company’s revenue story and not just to comply with the standard.

Break down revenue into meaningful categories such as:

• Type of good or service (e.g., product sales, consulting, support)
• Geographical region (e.g., EU vs. non-EU)
• Timing of recognition (e.g., point in time vs. over time)

Clearly explain:

• Significant judgments made in applying the standard (e.g., how performance obligations were identified or how variable consideration was estimated)
• Changes in estimates or assumptions that had a material impact
• Remaining performance obligations and when you expect to recognise them

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A Practical IFRS 15 Review Checklist

Use this checklist to assess whether the company’s revenue recognition process is aligned with IFRS 15 and to spot potential red flags before they become issues:

• Are performance obligations clearly identified, distinct and documented?
• Is variable consideration estimated appropriately?
• Are disclosures tailored to your business model?
• Are contract modifications tracked and reflected in revenue?
• Are judgments and estimates reviewed regularly?

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While IFRS 15 provides a clear framework for revenue recognition, its practical application still presents challenges. Misidentifying performance obligations, overlooking variable consideration, and underutilising disclosures are common pitfalls that can undermine compliance and transparency. By applying the standard thoughtfully, businesses can not only stay compliant but also communicate their revenue story more effectively.