How do you disclose revenue from contracts with customers?

1 What is the accounting standard?

The accounting standard that provides guidance on how to recognize and disclose revenue from contracts with customers is called IFRS 15 or ASC 606, depending on the jurisdiction. This standard was issued in 2014 and became effective in 2018, with the aim of creating a consistent and comparable framework for revenue reporting across industries and markets.

2 How does the standard work?

The standard requires you to follow five steps to determine when and how much revenue to recognize from a contract with a customer. These steps include identifying the contract and performance obligations, determining the transaction price, allocating the transaction price, and recognizing revenue when the performance obligations are satisfied. Each step involves applying specific criteria and judgments based on the facts and circumstances of the contract, while also considering the impact of variable consideration, discounts, incentives, warranties, returns, and other factors that may affect the amount and timing of revenue recognition.

3 What are the disclosure requirements?

The standard requires you to disclose qualitative and quantitative information about your revenue from contracts with customers, such as disaggregating revenue by category, segment, geography, or other criteria that reflect how you manage and evaluate your revenue streams. It also requires a reconciliation of the opening and closing balances of contract assets and liabilities, along with an explanation of the changes during the period. Furthermore, you must provide the amount of revenue recognized from performance obligations satisfied in previous periods, as well as the amount of revenue expected to be recognized in future periods from performance obligations unsatisfied or partially satisfied at the end of the period. Additionally, you must include the significant judgments and estimates used in applying the standard, along with changes in those judgments and estimates from period to period. Lastly, you must provide information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

4 Why is the standard important?

The standard is important because it affects how you measure and communicate your revenue performance to your stakeholders, such as investors, lenders, regulators, and customers. It also affects how you design and execute your contracts, pricing strategies, sales incentives, and revenue management processes. By following the standard, you can ensure that your revenue from contracts with customers is recognized and disclosed in a faithful, transparent, and consistent manner.