IFRS 15 and ASC 606 are two accounting standards that have been introduced to streamline the way companies recognize revenue from contracts with customers. The standards have created a single, consistent revenue recognition model across all industries, which has made it easier for investors and other stakeholders to understand how a company`s revenue is generated.
In simple terms, IFRS 15 and ASC 606 require companies to recognize revenue when they transfer control of a product or service to a customer. The key idea here is that revenue should only be recognized when the customer has received what they paid for. This means that companies need to be able to show that they have fulfilled their obligations to the customer before they can recognize revenue.
One of the most significant changes introduced by IFRS 15 and ASC 606 is the requirement to account for performance obligations. A performance obligation is essentially a promise made by a company to a customer in exchange for payment. Under the new standards, companies need to identify each performance obligation in a contract and allocate the revenue associated with it accordingly.
For example, if a company sells a software package to a customer and also provides ongoing technical support, these two elements will likely be two separate performance obligations. The revenue associated with the software sale would be recognized immediately upon transfer of control, while the revenue associated with ongoing support services would be recognized over time as the services are provided.
Another key change introduced by IFRS 15 and ASC 606 is the requirement to disclose more information about revenue recognition in financial statements. This includes details about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. These disclosures are designed to help stakeholders understand the factors that influence a company`s revenue recognition, including the impact of performance obligations, contract terms, and other factors.
In conclusion, IFRS 15 and ASC 606 have introduced a more consistent and transparent way of recognizing revenue from contracts with customers. The standards are designed to ensure that companies recognize revenue only when they have fulfilled their obligations to customers and provide more information to stakeholders on the factors influencing revenue recognition. As a professional, it`s important to understand these standards and communicate them clearly to readers who may be interested in a company`s financial performance.