IFRS 15 Revenue: Satisfying Performance Obligations, Contract Costs and Specific Cases

The last step of the five-step model decides when revenue appears. Some obligations are met over time, such as a year of payroll processing or a building under construction, and revenue follows the progress. Others are met at a point in time, such as the delivery of a machine.

This topic covers how to tell the two apart, how progress is measured, the accounting for costs of obtaining and fulfilling contracts, how contracts appear in the statement of financial position, and the specific cases examined at this level: principal and agent, sales with a right of return, repurchase agreements, bill-and-hold sales, consignment, warranties and licences. The next topic covers provisions and contingencies.

In the diets reviewed for this page, May Diet, 2022, Question 5(a) asked for a comparison of contract liabilities and contract assets, May Diet, 2025, Question 6(e) asked for steps 3 to 5 of the model (5 marks), and May Diet, 2026, Question 2(c) asked for explanations of repurchase agreements and bill-and-hold arrangements (3 marks each). Read the transaction price and its allocation first.

Step 5: satisfying a performance obligation

Revenue is recognised when (or as) the entity satisfies a performance obligation by transferring a promised good or service to the customer. The amount recognised is the transaction price allocated to that obligation. A good or service is transferred when the customer obtains control of it: the ability to direct its use and obtain substantially all of the remaining benefits.

At the start of the contract the entity decides, for each obligation, whether it is satisfied over time or at a point in time.

Over time

An obligation is satisfied over time if any one of these is met:

1. the customer simultaneously receives and consumes the benefits as the entity performs (payroll processing for a year; access to health clubs);
2. the entity’s performance creates or enhances an asset, such as work in progress, that the customer controls as it is created or enhanced; or
3. the entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.

At a point in time

If none of the over-time criteria is met, the obligation is satisfied at a point in time, when the customer obtains control. Indicators include that the entity has a present right to payment, the customer has legal title, the customer has physical possession, the customer has the significant risks and rewards of ownership, and the customer has accepted the asset.

Measuring progress

For an obligation satisfied over time, revenue is recognised by measuring progress towards complete satisfaction. One method is used for each obligation, applied consistently to similar obligations, and progress is remeasured at each reporting date.

• Output methods measure the value to the customer of what has been transferred so far: surveys of work done, appraisals of results, milestones reached, time elapsed or units delivered or produced. They can be hard to apply when outputs are not directly observable.
• Input methods compare the entity’s efforts to date with the total expected: labour hours used to total expected hours, or costs incurred to total expected costs. Revenue may be straight-line if inputs are spread evenly.

Under an input method, any input that does not represent progress is excluded. Costs from significant inefficiency that was not priced into the contract, such as re-laying a failed foundation, are left out of both costs incurred and total expected costs. Progress is cumulative, so the revenue for a period is the cumulative revenue to date less the revenue recognised in earlier periods.

Contract costs

• Costs of obtaining a contract. The incremental costs, those that would not have been incurred if the contract had not been won, are capitalised as an asset if the entity expects to recover them. A sales commission is incremental. External legal fees for due diligence and travel to present a proposal are incurred anyway, so they are expensed. If the amortisation period would be one year or less, the entity may expense the costs as incurred.
• Costs of fulfilling a contract. If another standard (for example International Accounting Standard (IAS) 2 on inventories, IAS 16 on property, plant and equipment or IAS 38 on intangible assets) covers them, that standard applies. Otherwise they are capitalised only if all three hold: they relate directly to a contract or an anticipated contract; they generate or enhance resources used to satisfy future obligations; and they are expected to be recovered. Costs that are always expensed include general and administrative costs (unless chargeable to the customer), wasted materials and labour not reflected in the price, and costs relating to obligations already satisfied.
• Amortisation and impairment. The asset is amortised systematically, in line with the transfer of the related goods or services, and the period is updated for significant changes in timing. An impairment loss is recognised to the extent that the carrying amount exceeds the remaining consideration the entity expects less the directly related costs not yet expensed. A reversal is allowed, capped at the amount that would have been carried had there been no impairment.

Presentation in the statement of financial position

• A receivable is an unconditional right to consideration: only the passage of time is needed before it is due.
• A contract asset is the entity’s right to consideration for goods or services already transferred when that right is conditional on something other than time, such as delivering the other item in the contract. It becomes a receivable when the right becomes unconditional.
• A contract liability is the entity’s obligation to transfer goods or services for which it has received consideration, or for which an amount is due, from the customer. It is presented when the payment is made or due, whichever is earlier.

For example, a contract for products A and B at ₦5,000 allocates ₦2,000 to A (delivered in February) and ₦3,000 to B (delivered in March), but payment is due only once both are delivered. In February: Dr Contract asset ₦2,000, Cr Revenue ₦2,000. In March: Dr Receivable ₦5,000, Cr Contract asset ₦2,000, Cr Revenue ₦3,000.

If instead the full ₦5,000 were due on 31 January, before any delivery: Dr Receivable ₦5,000, Cr Contract liability ₦5,000, then Dr Contract liability and Cr Revenue as each product is delivered.

Specific cases

Principal or agent

An entity is a principal if it controls the good or service before it passes to the customer, and recognises the gross amount it is entitled to. An agent arranges for another party to provide the goods or services, and recognises only its fee or commission.

Indicators of an agent include that another party is primarily responsible for fulfilling the contract, the entity has no inventory risk, has no discretion over price, is paid by commission, and is not exposed to credit risk. For example, an agent sells goods that cost the principal ₦2,000,000 at a 20% mark-up, for 5% commission on selling price. It sells 80% for ₦1,920,000 and collects the cash. Its revenue is 5% × ₦1,920,000 = ₦96,000, and it owes the principal ₦1,920,000 − ₦96,000 = ₦1,824,000.

Sale with a right of return

The entity recognises revenue for the goods expected not to be returned, a refund liability for the expected returns, and an asset (with a matching reduction in cost of sales) for its right to recover the goods. An entity sells 500 items at ₦40,000, which cost ₦28,000, and expects 5% to be returned. Revenue is 475 × ₦40,000 = ₦19,000,000 and the refund liability is 25 × ₦40,000 = ₦1,000,000. Cost of sales is 475 × ₦28,000 = ₦13,300,000, and the right-of-return asset is 25 × ₦28,000 = ₦700,000. Gross profit is ₦5,700,000.

Repurchase agreements

A repurchase agreement is a contract in which an entity sells an asset and also promises, or has the option, to buy it back. The customer does not obtain control, because the repurchase right or obligation limits its ability to direct the use of the asset.

If the arrangement is a financing, the entity keeps the asset on its statement of financial position and recognises a financial liability for the cash received. The difference between the amount received and the amount to be repaid is interest. A forestry company that sells wood to a bank for ₦5,000,000 and agrees to buy it back a year later for ₦5,500,000 records Dr Cash, Cr Liability ₦5,000,000, interest of ₦500,000, and repays ₦5,500,000.

Bill-and-hold

In a bill-and-hold arrangement, goods are sold but held by the seller until the customer asks for delivery.

Revenue is recognised when the customer obtains control, which can be before delivery if all four criteria hold:

• the reason for the arrangement is substantive (for example, the customer asked for it)
• the product is identified separately as the customer’s
• it is ready for physical transfer
• the seller cannot use it or direct it to another customer

The seller then considers whether it also provides a custodial (warehousing) service, which is a separate obligation satisfied over time.

Consignment

Under a consignment, a product is delivered to a dealer for sale to end customers. Indicators that it is a consignment are that the entity controls the product until a specified event occurs, such as sale to an end customer or a period expiring, it can require the return of the product or move it elsewhere. The dealer has no unconditional obligation to pay for it.

Control has not passed on delivery, so revenue is recognised later, when the event occurs.

Warranties and licences

A warranty that only assures the product meets agreed specifications (an assurance-type warranty) is accounted for as a provision under IAS 37, covered in the next topic. A warranty that gives an extra service (a service-type warranty) is a separate performance obligation, with part of the price allocated to it and recognised over the warranty period.

A licence of intellectual property that gives a right to access the entity’s intellectual property as it changes over the licence period is satisfied over time. A licence that gives a right to use the intellectual property as it exists at the point the licence is granted is satisfied at a point in time. Sales-based and usage-based royalties follow the rule in the previous topic.

The ideas in more depth

Why control and not risks and rewards

The older standard focused on the transfer of risks and rewards, which could be judged in different ways. Control looks at who can direct and benefit from the asset, which is the criterion in the definition of an asset in the Conceptual Framework. Risks and rewards remain one of the indicators.

Why progress must exclude waste

If a contractor wastes money, the costs rise but the customer’s building is no further along. Counting wasted costs as progress would bring revenue forward for work that has not been done.

Sources and references

• International Financial Reporting Standard (IFRS) 15 Revenue from Contracts with Customers: satisfaction of performance obligations, measuring progress, contract costs, presentation, and application guidance on principal and agent, rights of return, repurchase agreements, bill-and-hold, consignment, warranties and licences.
• IAS 37 Provisions, Contingent Liabilities and Contingent Assets, for assurance-type warranties.

These points are stated as at 5 November 2026.

Worked examples

1. Year 1 progress.
   ₦2,100,000 ÷ ₦6,000,000 = 35%.
   Revenue = 35% × ₦8,400,000 = ₦2,940,000.
2. Year 2 progress.
   ₦4,500,000 ÷ ₦6,000,000 = 75%.
   Cumulative revenue = ₦6,300,000.
3. Year 2 revenue.
   ₦6,300,000 − ₦2,940,000 = ₦3,360,000.

1. Costs incurred excluding waste.
   ₦2,100,000 − ₦300,000 = ₦1,800,000.
2. Total expected excluding waste.
   ₦6,000,000 − ₦300,000 = ₦5,700,000.
3. Progress.
   ₦1,800,000 ÷ ₦5,700,000 = 31.58%.
4. Revenue.
   31.58% × ₦8,400,000 = ₦2,652,632.
   The ₦300,000 of waste is expensed.

1. Revenue and refund liability. Dr Cash ₦20,000,000, Cr Revenue ₦19,000,000 (475 items), Cr Refund liability ₦1,000,000 (25 items).
2. Cost of sales and asset. Dr Cost of sales ₦13,300,000, Dr Right-of-return asset ₦700,000, Cr Inventory ₦14,000,000.
3. Gross profit.
   ₦19,000,000 − ₦13,300,000 = ₦5,700,000.

How to answer in the exam

• Decide the timing first. Check the three over-time criteria in order and stop at the first one that is met.
• Progress. Write the fraction, apply it to the price, then subtract revenue already recognised.
• Contract assets and liabilities. Define each and give a one-line example, including when it becomes a receivable.
• Specific cases. For repurchase agreements say control does not pass; for bill-and-hold list the four criteria.

Common mistakes in the exam

• Recognising revenue when cash is received or the invoice is issued instead of when the obligation is satisfied.
• Forgetting to deduct revenue recognised in earlier years when progress is cumulative.
• Including wasted costs in the measure of progress.
• Calling a conditional right to payment a receivable.
• Recognising the full sale price as revenue when acting as an agent.
• Treating a sale and repurchase financing as a sale.
• Omitting the refund liability or the right-of-return asset.

Quick revision

• Over time if: consumed as performed, asset customer controls, or no alternative use plus right to payment. Otherwise a point in time.
• Progress: output or input methods; cumulative; exclude waste.
• Contract costs: capitalise incremental obtaining costs and qualifying fulfilment costs; amortise; test impairment.
• Receivable unconditional; contract asset conditional; contract liability payment in advance.
• Agent: fee only. Right of return: revenue, refund liability, asset. Repurchase: financing. Bill-and-hold: four criteria. Consignment: later.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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