Key Difference – IFRS 15 vs IAS 18
Both IFRS 15 – ‘Revenue from Contracts with Customers’ and IAS 18 -‘Revenue’ relate to the accounting treatments on recording income generated through business activities. IAS 18 was issued in December 1993, and IFRS 15 will be effective for accounting periods starting from January 2018. The key difference between IFRS 15 and IAS 18 is that while IFRS 15 provides a standardised five-step model to recognize all types of revenue earned from customer contracts, IAS 18 considers different recognition criteria for a different type of incomes received. From January 2018, IAS 18 will be replaced by IFRS 15.
What is IFRS 15
This is the new standard established by IASB (International Accounting Standards Board) for revenue recognition. The underlying principle of this standard is that the company should recognize and record revenue in a way that indicates the transfer of goods or services.
The following standards will also be replaced by IFRS 15 in addition to IAS 18.
- IAS 11 Construction Contracts
- SIC 31 Revenue – Barter Transaction Involving Advertising Services
- IFRIC 13 Customer Loyalty Programs
- IFRIC 15 Agreements for the Construction of Real Estate and
- IFRIC 18 Transfer of Assets from Customers
Five-Step Model to Recognize Revenue
The following 5 steps should be used under IFRS 15 to recognize revenue.
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
In the above process,
- Contract is the agreement between the buyer (customer) and the seller (company) to conduct a business transaction
- Performance obligation is a promise in the contract for the company to transfer a pre-agreed amount of goods or services to the customer on an agreed time subjected the intended quality requirements.
All the above criteria should be met in order to record the revenue under IFRS 15. If either of these requirements is not met, the contract should be further evaluated and should be amended to reflect a proper business transaction from which income would be received.
What is IAS 18?
Introduced by IASC (International Accounting Standards Council) IAS 18 states that revenue should be valued at fair value of the amounts of funds received or receivable. This means,
- The future economic benefit is associated with the inflow of funds.
- The amount of revenue can be measured with reliability.
IAS 18 provides accounting guidelines to record revenue generated from the following activities.
Sale of Goods
Revenue arising from selling goods is considered here; thus, this type of revenue is recognized by manufacturing organizations. In addition to the economic benefit and fair value criteria, all the risks and rewards of the goods have to be transferred to the buyer where the seller exerts no further control over the goods sold.
Performing a Service
A service contract can be a lengthy one where it may be delivered within a number of years. Thus, the stage of completion should be able to be valued reliably and the proportion of costs incurred for that specific accounting period has to be recognized.
Interest, Royalties and Dividends
In addition to the principle recognition criteria, the following should be considered for each type of revenue.
- Interest – using the effective interest method as set out in IAS 39 (Financial Instruments: Recognition and Measurement)
- Royalties – on an accruals basis in accordance with the substance of the relevant agreement
- Dividends – when the shareholder’s right to receive payment is established
IAS 18 contains principles for revenue recognition, but they are quite broad and as a result, many companies use their judgment to apply them to their specific situation. This is one of the main reasons for IAS 18 to be replaced by IFRS 15.
What is the difference between IFRS 15 and IAS 18?
IFRS 15 vs IAS 18
|IFRS 15 implements a uniform method in recognizing all types of revenue.||IAS 18 states that the recognition criteria depends on each type of revenue.|
|Reporting criteria will be recognized based on the contract and performance obligation.||Reporting criteria is decided on whether revenue is received from goods, services, interest, royalties or dividends.|
|IFRS 15 will be effective for accounting periods starting from on or after January 2018.||IAS 18 has been used from December 1993 and will be used until the effective date (January 2018) of IFRS 15.|
Summary – IFRS 15 vs IAS 18
The main difference between IFRS 15 and IAS 18 pertains to the revision of the accounting criteria over time in order to provide more relevant and accurate information to the users of financial statements. This is a common practice when nature of the business transactions are becoming more complex day by day. While different types of revenue are recognized in various ways under IAS 18, the new standard, IFRS 15 attempts to allow uniformity in recognizing all types of revenue. The success or failure of this can be only determined once it is implemented.
1. “IAS Plus.” IASB officially proposes to defer the effective date of IFRS 15. N.p., n.d. Web. 22 Feb. 2017.
2. “IFRS 15 vs. IAS 18: Huge Change Is Here!” IFRSbox. N.p., 21 Oct. 2016. Web. 22 Feb. 2017.
3. “IAS Plus.” IFRS 15 – Revenue from Contracts with Customers. N.p., n.d. Web. 22 Feb. 2017.
4. “IAS Plus.” IAS 18 – Revenue. N.p., n.d. Web. 22 Feb. 2017.
5. “ACCA – Think Ahead.” Revenue recognition | ACCA Qualification | Students | ACCA Global. N.p., n.d. Web. 22 Feb. 2017.
1. “SCO-2002-2005-product-and-services-revenue” By Credit: stats_for_all* Post on Yahoo! SCOX message board + upload to frappr/scoxies* Data points: Public information* Fair Use (CC BY-SA 2.5) via Commons Wikimedia