IFRS 15 and Leases: Aligning Revenue Recognition with Lease Agreements

Posted In | Finance | Accounting Software | Revenue Recognition

International Financial Reporting Standards (IFRS) aim to provide a global framework for how public companies prepare and disclose their financial statements. Maintaining uniform standards improves comparability and transparency across international boundaries. One significant standard is IFRS 15, which deals with revenue from contracts with customers, including those from leases. However, leasing transactions also fall under IFRS 16, a separate standard. This article explores the interplay between IFRS 15 and leasing agreements, mainly focusing on how businesses recognize revenue under these standards.

 

1. IFRS 15: Revenue from Contracts with Customers

Implemented in 2018, IFRS 15 introduces a five-step model for recognizing revenue from contracts with customers. These steps include identifying the contract, identifying the performance obligations, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) the entity satisfies a performance obligation. While IFRS 15 broadly impacts revenue recognition, it's particularly influential for companies with long-term customer contracts, including lease agreements.

 

2. Leases and IFRS 16

IFRS 16, another important standard, specifically addresses leases. It removes the classification of leases as either operating leases or finance leases, for the lessee, and instead introduces a single lessee accounting model. Essentially, all leases (with a few exceptions) should now be reported on the lessee's balance sheet to increase transparency about the lessee's financial leverage and capital employed.

 

3. Aligning IFRS 15 and Lease Agreements

The connection between IFRS 15 and lease agreements primarily lies in the interpretation and application of the standards. It's important to remember that IFRS 15 does not apply to lease contracts within the scope of IFRS 16. However, certain aspects of lease agreements could be subject to IFRS 15 if they involve providing goods or services to customers. For example, a lease contract might contain a service element, such as maintenance services. The revenue from this service component could fall under IFRS 15, while the lease income itself would be recognized under IFRS 16.

Therefore, companies need to allocate the transaction price between the lease (subject to IFRS 16) and non-lease components (subject to IFRS 15) based on their relative stand-alone selling prices. The company then recognizes revenue for the lease component as it provides the underlying asset's use and recognizes revenue for the non-lease components according to the general revenue recognition model under IFRS 15.

It's also worth noting that IFRS 15's guidance could affect lease modifications. If a lease modification adds distinct goods or services, the lessee should account for it as a separate contract and apply IFRS 15 accordingly.

 

Navigating the interplay between IFRS 15 and lease agreements under IFRS 16 can be challenging, given the complexity and specificity of each standard. However, by understanding the principles and criteria established in these standards, businesses can accurately recognize revenue from their contracts, including leases, promoting greater transparency and comparability in financial reporting. Ultimately, companies must carefully evaluate their contracts with customers, including leases, to determine the appropriate accounting treatment under the relevant IFRS standards. When in doubt, it's advisable to consult with accounting professionals or regulatory bodies to ensure compliance with these internationally recognized guidelines.