Executory Contract Ifrs 15

An executory contract, as defined by the International Financial Reporting Standards (IFRS) 15, is an agreement between two parties where both have obligations that are yet to be fulfilled. It is also known as a bilateral contract, where both parties have to perform certain actions to complete the contract.

IFRS 15, which was introduced in 2018, provides guidelines for recognizing revenue from contracts with customers. An executory contract is a key element that must be considered when determining revenue recognition under this standard.

According to IFRS 15, revenue from executory contracts can only be recognized if the entity has completed its performance obligations under the contract. This means that revenue recognition cannot occur until the contract is fully executed, and both parties have fulfilled their obligations.

For example, if a company signs a contract to provide services to a customer for a period of 12 months, the revenue can only be recognized when the 12 months are up, and the company has fulfilled all its obligations under the contract. Until then, the revenue should be recorded as deferred revenue.

It is important to note that IFRS 15 also requires entities to consider the possibility of contract modifications. If there are any changes to the original terms of the contract, such modifications must be accounted for separately and may impact the timing of revenue recognition.

Furthermore, IFRS 15 also requires entities to allocate the transaction price to each performance obligation within the contract. This means that if the contract contains multiple obligations, the revenue must be allocated to each obligation based on its relative stand-alone selling price.

In conclusion, when dealing with executory contracts under IFRS 15, it is crucial to consider the timing of revenue recognition and the possibility of contract modifications. Proper allocation of revenue to each performance obligation within the contract is also essential to ensure accurate financial reporting.

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This post was written by msuder