Revenue recognition by applying IFRS15 in financial statements

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School of Business | Bachelor's thesis
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This Bachelor’s thesis discusses the revenue recognition principles set by the new IFRS15 standard effective from 1 January 2018 onwards. The shortages found in old IAS11 and 18- standards propelled the development of the more consistent IFRS15 standard which was co-created by the IASB and FASB. The structure of this study is organized as follows. First, a short introduction of the relevance of revenue is presented, followed by the definition of revenue. Second, the content and applicability of the preceded IAS11 and IAS18 standards are analyzed as they lay the foundation for the creation of the IFRS15. The third section focuses on the new IFRS15 standard by covering its contents via the Revenue Model. The fourth section aims to enhance understanding about the standard’s application by giving concrete examples through charts and real-life cases. The fifth and final section concludes the thesis with takeover insights. The objective of the new IFRS15 is to simplify the revenue recognition principles in the IFRS world by emphasizing transparency and consistency in financial reporting. The lack of clarity found in former IAS-standards is now replaced with more principle-based rules, accounting for more difficult transactions such as licenses and warranties. The five-step model for recognizing revenue is helpful as it offers a clear path to follow at contract inception. Step one requires to identify the contract with customer. In step two, performance obligations are identified. The transaction price for the contract is determined in step three. In step 4 the transaction price is allocated to each performance obligation proportionately. Finally, revenue is recognized in step 5. Each step needs to be covered to successfully apply the IFRS15 standard. Studies conducted retrospectively found that the difficulty in complying with the requirements of the new standard varied depending on the industry and its characteristics. Especially, the identification of performance obligations and the allocation of transaction price turned out to be more challenging than expected. Although the new standard is much more applicable to complex cases such as costs of obtaining and fulfilling a contract, it still requires plenty of serious judgment in sectors like telecommunication and construction. The former standards allowed the entity to unrecognize transactions that were not considered income. The new IFRS15, however, doesn’t allow that. All revenue needs to be recognized in an amount that depicts the consideration determined at contract inception after the control of goods or services has been transferred to the customer. Having the ability to control the use of asset and obtain its benefits is the key indicator for the entity to determine whether the risks and rewards have been transferred to the customer. Further studies also showed that compliance with the standard was better in sectors where the standard’s effect on reporting was more substantial.
Thesis advisor
Kykkänen, Tapani
IFRS15, revenue recognition, the revenue model, reporting
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