Revenue Under IFRS 15: Getting the Timing and the Amount Right

IFRS 15 Revenue from Contracts with Customers decides when a business records its sales and how much it records. The rule sounds simple. In practice, contracts with bundled items, discounts, bonuses or long delivery periods can move revenue from one year to another. That changes reported profit and, in the UAE, can change taxable income too.

Why this matters now

Revenue is the first number investors, lenders and tax authorities look at, so it is the number most likely to be questioned. IFRS 15 has applied since 1 January 2018, yet many growing businesses still record revenue when they raise an invoice or receive cash. Under IFRS 15, neither event decides revenue on its own.

UAE Corporate Tax makes this sharper. Taxable income starts from accounting income under Article 20(1) of the Corporate Tax Law, and Ministerial Decision No. 114 of 2023 requires that accounting to follow IFRS, with IFRS for SMEs available to businesses with revenue up to AED 50 million. Revenue recognised in the wrong year moves profit, and the tax on it, into the wrong year.

The core idea in one sentence

Paragraph 2 sets the core principle: recognise revenue to depict the transfer of promised goods or services to customers, in an amount that reflects the consideration the business expects to be entitled to in exchange. The standard turns that into five steps.

Step 1: is there a real contract?

A contract can be written, oral or implied by customary business practice. Under paragraph 9 it counts only if both parties have approved it, each party's rights and the payment terms can be identified, it has commercial substance, and it is probable the business will collect the consideration. If those tests are not met, cash received is held as a liability rather than recognised as revenue, until the standard's conditions for recognising it are satisfied.

Step 2: what exactly did you promise?

Many contracts contain more than one promise: equipment, installation and a year of support, for example. Each good or service that the customer can benefit from on its own, and that is separately identifiable in the contract, is a separate performance obligation. Internal set-up activities, such as creating a customer account, transfer nothing to the customer and are not performance obligations.

Step 3: what is the price?

The transaction price is what you expect to be entitled to, not just the invoice figure. Discounts, rebates, refunds, penalties and performance bonuses make consideration variable. You estimate them, but you include variable amounts only to the extent it is highly probable that a significant reversal of revenue will not occur later. That is a deliberately cautious test.

Two adjustments are easy to miss. Where payment and delivery are separated by more than a year, the price may need adjusting for a significant financing component; under a year, a practical expedient lets you ignore it. And amounts collected on behalf of third parties, such as VAT, are excluded from the price altogether.

Step 4: split the price across the promises

The price is allocated in proportion to each obligation's stand-alone selling price, what it would sell for on its own. A bundle discount is normally spread across every item rather than pushed onto one. The result often differs from the invoice breakdown, especially where a service is described as free.

Step 5: recognise revenue when you deliver

Revenue is recognised when the customer obtains control of the good or service: the ability to direct its use and obtain substantially all of its benefits. That happens over time if any one of three tests is met:

• the customer receives and consumes the benefit as you perform, as with a monthly service;
• your work creates or enhances an asset the customer controls as it is built; or
• your work creates an asset with no alternative use to you, and you have an enforceable right to payment for work completed to date.

Everything else is recognised at a point in time, using indicators such as legal title, physical possession, the transfer of risks and rewards, customer acceptance and a present right to payment.

Where businesses usually get it wrong

Balance sheet and disclosures

Paragraphs 105 to 107 deal with presentation. When you have performed but your right to payment is still conditional on something other than time, you show a contract asset. When the customer has paid, or payment is due, before you perform, you show a contract liability. The notes must break revenue down, explain when obligations are typically satisfied and the significant judgements made, and show how much revenue is still to come from contracts already signed.

The bottom line

IFRS 15 rewards businesses that understand their own contracts. The accounting follows the agreement, not the invoice. Mapping the main contract types once, and writing down the judgements behind them, avoids surprises at the audit, at the tax return and in due diligence.

How BIFI Partners helps

BIFI Partners reviews a business's main contract types against the five steps, writes a revenue policy the finance team and auditors can rely on, checks how revenue timing affects the Corporate Tax and VAT position, prepares working papers before auditors or buyers ask for them, and trains finance teams in plain language.