Do You Need to Discuss IFRS 15 Step 1 in Depth?

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The CPA Canada PEP and CFE exams are designed to assess your in-depth understanding of various financial reporting standards, including IFRS 15: Revenue from contracts.

Common challenge for candidates in addressing IFRS 15 AOs is whether Step 1 needs to be discussed in detail. Sometimes, a simple statement such as: “Contract has been approved by both parties” suffices. However, in other solutions, you’ll see the answer go into depth of 5 sub-steps outlined in IFRS 15.

So what is the correct approach?

Understanding IFRS 15

First, we must understand the basics of IFRS 15. This standard is divided into 5 steps:

  1. Identify the contract with a customer
  2. Identify the performance obligations
  3. Determine the overall transaction price
  4. Allocate the transaction price to the performance obligations
  5. Recognize revenue as the entity satisfies a performance obligation

Step 1 is further divided into 5 sub-steps (sub-criteria) that a contract must meet to qualify for revenue recognition:

  1. Contract has been approved by the parties involved.
  2. Each party’s rights in relation to the goods or services to be transferred are identifiable.
  3. The payment terms for the goods or services to be transferred can be identified.
  4. Contract has commercial substance.
  5. It is probable that the entity will collect the consideration

Going through each of the sub-steps will take valuable case writing time. However, they are part of the standard and can’t be omitted. So what do we do?

Should you discuss the 5 sub-steps?

I recommend listing the IFRS 15 Step 1 sub-steps, but don’t discuss them one-by-one. Instead, at the end, say “MET” or “NOT MET” and explain why. For example, take a look below how CFE 2019 Elcar case handled it:

You can see it listed the Step 1’s sub-steps, then analyzed everything in one shot at the end. This is an effective way to approach IFRS 15 since it follows the standard accurately and saves case writing time.

Furthermore, the CPA Canada Feedback Guides don’t put emphasis on Step 1 of IFRS 15. Instead, Step 2 and Step 4 are the most important

As such, we must spend most of our time analyzing steps 2 and 4.

Extra resources

Extra resources are available at PEP and CFE Review courses.