ACCA Financial Reporting (F7) Practice Exam

What must be done prior to recognizing revenue from a contract under IFRS 15?

1. Identify performance obligations

2. Determine estimated completion costs

3. Revisit previous revenue contracts

4. Calculate total expected revenue

The correct answer is: Identify performance obligations

Prior to recognizing revenue from a contract under IFRS 15, identifying performance obligations is crucial. This step involves determining what specific goods or services are promised to the customer within the contract. By clearly defining these performance obligations, a company can better ascertain when control of each good or service is transferred to the customer, which is essential for revenue recognition. The identification of performance obligations sets the foundation for the entire revenue recognition process. Each performance obligation may have different criteria or timelines for revenue recognition, and only once these obligations are identified can the business proceed to allocate the transaction price and recognize revenue appropriately. While determining estimated completion costs, revisiting previous revenue contracts, and calculating total expected revenue are relevant to the overall revenue process, they occur after the performance obligations have been established and do not precede revenue recognition. Understanding performance obligations is the first step in aligning accounting practices with the guidance set out in IFRS 15, ultimately ensuring accurate and compliant revenue reporting.