1.1 The distinction between income, revenue and gains

Income is defined in IFRS 15 as ‘increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants’. [IFRS 15 Appendix A]. The Conceptual Framework for Financial Reporting similarly defines income. [CF 4.68].

This definition encompasses both, ‘revenue’ and ‘gains’. IFRS 15 defines revenue as income that arises in the course of the ordinary activities of an entity. [IFRS 15 Appendix A]. As discussed at 1 above, according to the International Accounting Standards Board's (IASB or the Board) 2010 Conceptual Framework for Financial Reporting (which applied when IFRS 15 was issued), it can include sales, fees, interest, dividends, royalties and rent. [CF(2010) 4.29]. Gains represent other items that meet the definition of income and may, or may not, arise in the course of the ordinary activities of an entity. Gains include, for example, those arising on the disposal of non-current assets. The definition of income also includes unrealised gains; for example, those arising on the revaluation of marketable securities and those resulting from increases in the carrying amount of long-term assets. [CF(2010) 4.31]. The 2018 Conceptual Framework for Financial Reporting no longer contains a discussion about revenue and gains and losses. However, the definition of revenue in IFRS 15 remains unchanged. The Board does not expect the removal of that discussion to cause any changes in practice. [CF BC4.96].

The rules on offset in IAS 1 – Presentation of Financial Statements – distinguish between revenue and gains. That standard states that an entity undertakes, in the course of its ordinary activities, other transactions that do not generate revenue but are incidental to the main revenue-generating activities. When this presentation reflects the substance of the transaction or other event, the results of such transactions are presented by netting any income with related expenses arising on the same transaction. For example, gains and losses on the disposal of non-current assets, including investments and operating assets, are reported by deducting from the proceeds on disposal the carrying amount of the asset and related selling expenses. [IAS 1.34]. IAS 16 – Property, Plant and Equipment – has a general rule that ‘gains shall not be classified as revenue’. [IAS 16.68]. The only exception to this rule is where an entity routinely sells property, plant and equipment (PP&E) that it has held for rental to others, which is discussed further at 4.3.1 below.

2.1 Overview of the standard

The revenue standards the Boards issued in May 2014 were largely converged and superseded virtually all revenue recognition requirements in IFRS and US GAAP, respectively. The Boards' goal in the joint deliberations was to develop new revenue standards that:

• remove inconsistencies and weaknesses in the legacy revenue recognition literature;
• provide a more robust framework for addressing revenue recognition issues;
• improve comparability of revenue recognition practices across industries, entities within those industries, jurisdictions and capital markets;
• reduce the complexity of applying revenue recognition requirements by reducing the volume of the relevant standards and interpretations; and
• provide more useful information to users through expanded disclosure requirements. [IFRS 15 (2016).IN5].²

The standards provide accounting requirements for all revenue arising from contracts with customers. They affect all entities that enter into contracts to provide goods or services to their customers, unless the contracts are in the scope of other IFRSs or US GAAP requirements, such as the leasing standards. The standards also specify the accounting for costs an entity incurs to obtain and fulfil a contract to provide goods or services to customers (see Chapter 31 at 5) and provide a model for the measurement and recognition of gains and losses on the sale of certain non-financial assets, such as property, plant or equipment (see 4.3 below). IFRS 15 replaced all of the legacy revenue standards and interpretations in IFRS, including IAS 11 – Construction Contracts, IAS 18 – Revenue, IFRIC 13 – Customer Loyalty Programmes, IFRIC 15 – Agreements for the Construction of Real Estate, IFRIC 18 – Transfers of Assets from Customers – and SIC‑31 – Revenue – Barter Transactions Involving Advertising Services. [IFRS 15.C10].

After issuing the standards, the Boards have issued converged amendments on certain topics (e.g. principal versus agent considerations) and different amendments on other topics (e.g. licences of intellectual property). The FASB has also issued several amendments that the IASB has not issued (e.g. non-cash consideration). See 2.1.2 below for a discussion of the changes to the standards since issuance. While we address the significant differences between the IASB's final standard and the FASB's final standard throughout this chapter and in Chapters 28‑32, the primary purpose of this chapter, and Chapters 28‑32, is to describe the IASB's standard, including all amendments to date, and focus on the effects for IFRS preparers. As such, we generally refer to the ‘standard’ in the singular in this chapter and in Chapters 28‑32.

2.2 Effective date

IFRS 15 became effective for annual reporting periods beginning on or after 1 January 2018. Early adoption was permitted, provided that fact was disclosed. [IFRS 15.C1].

The FASB's standard became effective for public entities, as defined,⁵ for fiscal years beginning after 15 December 2017 and interim periods therein. Non-public entities (i.e. an entity that does not meet the definition of a public entity in the FASB's standard) are required to adopt the standard for fiscal years beginning after 15 December 2018 and for interim periods within fiscal years beginning after 15 December 2019. That is, non-public entities are not required to apply the standard in interim periods in the year of adoption.

US GAAP public and non-public entities were permitted to adopt the standard as early as the original public entity effective date (i.e. fiscal years beginning after 15 December 2016, including interim periods therein).

2.3 Transition methods in IFRS 15

IFRS 15 required retrospective application. However, it allowed either a ‘full retrospective’ adoption in which the standard was applied to all of the periods presented or a ‘modified retrospective’ adoption (see 2.3.1 and 2.3.2 below, respectively).

IFRS 15 defines a completed contract as a contract for which the entity has fully transferred all of the goods or services identified in accordance with legacy IFRS (see 2.4.1 below for further discussion). [IFRS 15.C2(b)]. Depending on the manner an entity elected to transition to IFRS 15, an entity may not have needed to apply IFRS 15 to contracts if they had completed performance before the date of initial application or the beginning of the earliest period presented (depending on the practical expedient) (see 2.3.1 and 2.3.2 below), even if they had not yet received the consideration and that consideration was still subject to variability. Applying a completed contract practical expedient might also affect an entity's revenue recognition in subsequent reporting periods. That is, if an entity applied a practical expedient for completed contracts, it continues to apply its legacy revenue policy to its completed contracts, instead of IFRS 15. In some cases, even though an entity has fully transferred its identified goods or services, there may still be revenue to recognise in reporting periods after adoption of IFRS 15.

The definition of a ‘completed contract’ is not converged between IFRS and US GAAP. A completed contract under ASC 606 is defined as one for which all (or substantially all) of the revenue was recognised in accordance with legacy US GAAP requirements that were in effect before the date of initial application.⁶

The different definitions may have led to entities having a different population of contracts to transition to the revenue standards under IFRS and US GAAP, respectively. However, an entity may have avoided the consequences of these different definitions by choosing to apply IFRS 15 retrospectively to all contracts, including completed contracts. [IFRS 15.BC445I].

The following were the dates relevant to transition:

• The date of initial application – the start of the reporting period in which an entity first applies IFRS 15. [IFRS 15.C2(a)]. This date of initial application did not change, regardless of the transition method that was applied. Examples of dates of initial application for different year-ends included:

• The beginning of the earliest period presented – the start of the earliest reporting period presented within an entity's financial statements for the reporting period in which the entity first applies IFRS 15. This was relevant for entities using the full retrospective adoption method. For example:

2.4 Adopting IFRS 15 as part of first-time adoption of IFRS

IFRS 1 – First-time Adoption of International Financial Reporting Standards – applies (and not IFRS 15) when adopting IFRS 15 as part of first time-adoption of IFRS (see Chapter 5 for the requirements of IFRS 1).

IFRS 1 permits a first-time adopter to apply the optional practical expedients included in paragraph C5 of IFRS 15 (i.e. those available for entities applying the full retrospective method, see 2.3.1 above) and not to restate contracts that were completed before the earliest period presented (see 2.4.1 below). [IFRS 1.D34, D35]. See 2.4.3 below for further discussion on applying the optional practical expedients.

Although IFRS 1 also provides the same optional practical expedients available for IFRS preparers applying the full retrospective method, adoption of IFRS 15 by first-time adopters may be challenging. For example, determination of completed contracts may be challenging if first-time adopters' previous accounting standards were not clear about when the goods or services had been transferred (see 2.4.1 and 2.4.2 below for discussion on the definition of a completed contract).

When adopting IFRS 15 as part of its transition to IFRS, a first-time adopter needs to analyse each of its contracts to determine the appropriate timing and pattern of recognition, considering the specific criteria and requirements of the standard. In some instances, this could result in a change in the timing and/or pattern of revenue recognition compared to its legacy GAAP. For example, a transaction in which a first-time adopter might have a change in recognition timing is that of a contract manufacturer that produces goods designed to a customer's unique specifications and can reasonably conclude that the goods do not have an alternative use. If the manufacturer also has an enforceable right to payment for performance completed to date, it would meet the standard's third criterion to recognise revenue over time (see Chapter 30 for further discussion), even though it might have recognised revenue at a point in time under its legacy GAAP (e.g. based on the number of units produced or units delivered).

Other application issues that may make adopting IFRS 15 as part of transitioning to IFRS difficult and/or time-consuming, include the following:

• First-time adopters will have to perform an allocation of the transaction price because of changes to the identified deliverables, the transaction price or both. If a first-time adopter's legacy GAAP required a method that is similar to the requirements in IFRS 15, this step may be straightforward. Regardless, a first-time adopter is required to determine the stand-alone selling price of each performance obligation as at inception of the contract. Depending on the age of the contract, this information may not be readily available and the prices may differ significantly from current stand-alone selling prices. While the practical expedients in paragraph C5 of IFRS 15 are clear about when it is acceptable to use hindsight in respect of variable consideration to determine the transaction price (see Chapter 29 at 2.2 for a discussion on variable consideration), it is silent on whether the use of hindsight is acceptable for other aspects of the model (e.g. for the purpose of allocating the transaction price) or whether it is acceptable to use current pricing information if that were the only information available.
• Estimating variable consideration for all contracts for prior periods is likely to require significant judgement. The standard is clear that hindsight cannot be used for contracts that are not completed. As a result, entities must make this estimate based only on information that was available at contract inception. Contemporaneous documentation clarifying what information was available to management, and when it was available, is likely to be needed to support these estimates. In addition to estimating variable consideration using the expected value or a most likely amount method, first-time adopters have to make conclusions about whether such variable consideration is subject to the constraint (see Chapter 29 at 2.2.3 for further discussion).

Finally, first-time adopters need to consider a number of other issues as they prepare to adopt IFRS 15 as part of their adoption of IFRS. For example, first-time adopters with significant deferred revenue balances under their legacy GAAP may experience what some refer to as ‘lost revenue’ if those amounts were deferred at the date of adoption of IFRS and, ultimately, are reflected in the restated prior periods or as part of the cumulative adjustment upon transition, but are never reported as revenue in a current period within the financial statements.

2.5 Definitions

The following table summarises the terms that are defined in IFRS 15. [IFRS 15 Appendix A].

3.1 Scope of IFRS 15

IFRS 15 applies to all entities and all contracts with customers to provide goods or services in the ordinary course of business, except for the following contracts, which are specifically excluded: [IFRS 15.5]

• lease contracts within the scope of IFRS 16;
• insurance contracts within the scope of IFRS 4 – Insurance Contracts (or, when effective, contracts within the scope of IFRS 17 – Insurance Contracts – except when an entity elects to apply IFRS 15 to certain service contracts in accordance with paragraph 8 of IFRS 17);
• financial instruments and other contractual rights or obligations within the scope of IFRS 9, IFRS 10 – Consolidated Financial Statements, IFRS 11 – Joint Arrangements, IAS 27 – Separate Financial Statements – and IAS 28 – Investments in Associates and Joint Ventures; and
• non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers.

Arrangements must meet the criteria set out in paragraph 9 of IFRS 15, which are discussed in Chapter 28 at 2.1, to be accounted for as a revenue contract under the standard.

For certain arrangements, entities must evaluate their relationship with the counterparty to the contract in order to determine whether a vendor-customer relationship exists. Some collaboration arrangements, for example, are more akin to a partnership, while others have a vendor-customer relationship. Only transactions that are determined to be with a customer are within the scope of IFRS 15. The definition of a customer is discussed at 3.3 below. See 3.4 below for a discussion on collaborative arrangements.

Furthermore, entities may enter into transactions that are partially within the scope of IFRS 15 and partially within the scope of other standards. In these situations, the standard requires an entity to apply any separation and/or measurement requirements in the other standard first, before applying the requirements in IFRS 15. See 3.5 below for further discussion.

As noted above, when effective, IFRS 17 could change the applicable standard for certain service contracts, specifically fixed-fee service contracts, which are contracts in which the level of service depends on an uncertain event. Examples include roadside assistance programmes and maintenance contracts in which the service provider agrees to repair specified equipment after a malfunction for a fixed fee. IFRS 17 indicates that these are insurance contracts and therefore, when it is effective, that standard would apply. However, if their primary purpose is the provision of services for a fixed fee, IFRS 17 permits entities the choice of applying IFRS 15 instead of IFRS 17 to such contracts if, and only if, all of the following conditions are met: [IFRS 17.8]

• the entity does not reflect an assessment of the risk associated with an individual customer in setting the price of the contract with that customer;
• the contract compensates the customer by providing services, rather than by making cash payments to the customer; and
• the insurance risk transferred by the contract arises primarily from the customer's use of services rather than from uncertainty over the cost of those services.

The entity may make that choice on a contract by contract basis, but the choice for each contract is irrevocable. See Chapter 56 at 2.3.2 for further discussion.

3.2 Other scope considerations

Certain arrangements executed by entities include repurchase provisions, either as a component of a sales contract or as a separate contract that relates to the same or similar goods in the original agreement. The form of the repurchase agreement and whether the customer obtains control of the asset will determine whether the agreement is within the scope of the standard. See Chapter 30 at 5 for a discussion on repurchase agreements.

IFRS 15 also specifies the accounting for certain costs, such as the incremental costs of obtaining a contract and the costs of fulfilling a contract. However, the standard is clear that these requirements only apply if there are no other applicable requirements in IFRS for those costs. See Chapter 31 at 5 for further discussion on the requirements relating to contract costs in the standard.

Certain requirements in IFRS 15 are also relevant for the recognition and measurement of a gain or loss on the disposal of a non-financial asset not in the ordinary course of business. See 4.3 below for further discussion.

3.3 Definition of a customer

The standard defines a customer as ‘a party that has contracted with an entity to obtain goods or services that are an output of the entity's ordinary activities in exchange for consideration'. [IFRS 15 Appendix A]. IFRS 15 does not define the term ‘ordinary activities’ because it was derived from the definitions of revenue in the respective conceptual frameworks of the IASB and the FASB in effect when the standards were developed. In particular, the description of revenue in the IASB's Conceptual Framework for Financial Reporting at that time referred specifically to the ‘ordinary activities’ of an entity – [CF(2010) 4.29, IFRS 15 Appendix A] – and the definition of revenue in the FASB's Statement of Financial Accounting Concepts No. 6 refers to the notion of an entity's ‘ongoing major or central operations’.⁷ In many transactions, a customer is easily identifiable. However, in transactions involving multiple parties, it may be less clear which counterparties are customers of the entity. For some arrangements, multiple parties could all be considered customers of the entity. However, for other arrangements, only some of the parties involved are considered customers.

Example 27.5 below shows how the party considered to be the customer may differ, depending on the specific facts and circumstances.

In addition, the identification of the performance obligations in a contract (discussed further in Chapter 28 at 3) can have a significant effect on the determination of which party is the entity's customer. Also see the discussion of the identification of an entity's customer when applying the application guidance on consideration paid or payable to a customer in Chapter 29 at 2.7.

3.4 Collaborative arrangements

Entities often enter into collaborative arrangements to, for example, jointly develop and commercialise intellectual property (such as a drug candidate in the life sciences industry or a motion picture in the entertainment industry). In such arrangements, a counterparty may not always be a ‘customer’ of the entity. Instead, the counterparty may be a collaborator or partner that shares in the risks and benefits of developing a product to be marketed. [IFRS 15.6]. This is common in the pharmaceutical, bio-technology, oil and gas, and health care industries. However, depending on the facts and circumstances, these arrangements may also contain a vendor-customer relationship component. Such contracts could still be within the scope of IFRS 15, at least partially, if the collaborator or partner meets the definition of a customer for some, or all, aspects of the arrangement. If the collaborator or partner is not a customer, the transaction is not within the scope of IFRS 15. An example of transactions between collaborators or partners not being within the scope of IFRS 15 was discussed by the IFRS Interpretations Committee in March 2019; it related to the output to which an entity is entitled from a joint operation, but which the entity has not yet received and sold to its customers (see 3.5.1.K below).

The IASB decided not to provide additional application guidance for determining whether certain revenue-generating collaborative arrangements are within the scope of IFRS 15. In the Basis for Conclusions, the IASB explained that it would not be possible to provide application guidance that applies to all collaborative arrangements. [IFRS 15.BC54]. Therefore, the parties to such arrangements need to consider all facts and circumstances to determine whether a vendor-customer relationship exists that is subject to the standard.

However, the IASB did determine that, in some circumstances, it may be appropriate for an entity to apply the principles in IFRS 15 to collaborations or partnerships (e.g. when there are no applicable or more relevant requirements that could be applied). [IFRS 15.BC56].

Identifying the customer can be difficult, especially when multiple parties are involved in a transaction. This evaluation may require significant judgement and IFRS 15 does not provide many factors to consider.

Furthermore, transactions among partners in collaboration arrangements are not within the scope of IFRS 15. Therefore, entities need to use judgement to determine whether transactions are between partners acting in their capacity as collaborators or reflect a vendor-customer relationship.

3.5 Interaction with other standards

The standard provides requirements for arrangements partially within the scope of IFRS 15 and partially within the scope of other standards. IFRS 15 states that if the other standards specify how to separate and/or initially measure one or more parts of the contract, then an entity shall first apply the separation and/or measurement requirements in those standards. An entity shall exclude from the transaction price (as discussed in Chapter 29 at 2) the amount of the part (or parts) of the contract that are initially measured in accordance with other standards and shall apply the allocation requirements in IFRS 15 (as discussed in Chapter 29 at 3) to allocate the amount of the transaction price that remains (if any) to each performance obligation within the scope of IFRS 15. If the other standards do not specify how to separate and/or initially measure one or more parts of the contract, then the entity shall apply IFRS 15 to separate and/or initially measure the part (or parts) of the contract. [IFRS 15.7]. Figure 27.2 illustrates these requirements.

If a component of the arrangement is covered by another standard or interpretation that specifies how to separate and/or initially measure that component, the entity needs to apply IFRS 15 to the remaining components of the arrangement. Some examples of where separation and/or initial measurement are addressed in other IFRS include the following:

• IFRS 9 requires that a financial instrument be recognised at fair value at initial recognition. For contracts that include the issuance of a financial instrument and revenue components within the scope of IFRS 15 and the financial instrument is required to be initially recognised at fair value, the fair value of the financial instrument is first measured and the remainder of the estimated contract consideration is allocated among the other components in the contract in accordance with IFRS 15.
• A contract may contain a lease coupled with an agreement to sell other goods or services (e.g. subject to IFRS 15). IFRS 16 requires that a lessor accounts separately for the lease component (in accordance with IFRS 16) and any non-lease components (in accordance with other standards) and provides application guidance on separating the components of such a contract. [IFRS 16.12, B32, B33]. A lessor allocates the consideration in a contract that contains a lease component and one or more additional lease or non-lease components by applying the requirements in IFRS 15 for allocating the transaction price to performance obligations and changes in the transaction price after contract inception (see Chapter 29). [IFRS 16.17]. Refer to Chapter 23 for more information on IFRS 16.

Conversely, if a component of the arrangement is covered by another standard or interpretation, but that standard or interpretation does not specify how to separate and/or initially measure that component, the entity needs to apply IFRS 15 to separate and/or initially measure each component. For example, specific requirements do not exist for the separation and measurement of the different parts of an arrangement when an entity sells a business and also enters into a long-term supply agreement with the other party. See Chapter 29 at 3.6 for further discussion on the effect on the allocation of arrangement consideration when an arrangement includes both revenue and non-revenue components.

4.1 Income and distributable profits

In general, IFRS does not address the issue of the distribution of profit. Whether or not revenue and gains recognised in accordance with IFRS are distributable to shareholders of an entity will depend entirely on the national laws and regulations with which the entity needs to comply. Thus, income reported in accordance with IFRS does not necessarily imply that such income would either be realised or distributable under a reporting entity's applicable national legislation.

4.2 Interest and dividends

Entities (e.g. financial institutions) may earn interest or dividends in the course of their ordinary activities and, therefore, present these transactions as revenue. The relevant recognition and measurement requirements are included in IFRS 9. These transactions are recognised as follows:

• Interest: calculated by using the effective interest method [IFRS 9 Appendix A, IFRS 9.5.4.1, B5.4.1-B5.4.7] as discussed in Chapter 50 at 3;
• Dividends: when the shareholder's right to receive payment is established, it is probable that the economic benefits associated with the dividend will flow to the entity and the amount of the dividend can be measured reliably. [IFRS 9.5.7.1A]. See Chapter 50 at 2.

4.3 Disposal of non-financial assets not in the ordinary course of business

When an entity disposes of an asset that is within the scope of IAS 16, IAS 38 – Intangible Assets – and IAS 40 – Investment Property – and that disposal is not part of the entity's ordinary activities, the transaction is within the scope of those standards, not IFRS 15. However, IAS 16, IAS 38 and IAS 40 require entities to use certain of the requirements of IFRS 15 when recognising and measuring gains or losses arising from the sale or disposal of non-financial assets.

IAS 16, IAS 38 and IAS 40 require that the gain or loss arising from the disposal of a non-financial asset be included in profit or loss when the item is derecognised, unless IFRS 16 requires otherwise on a sale and leaseback. IAS 16 and IAS 38 specifically prohibit classification of any such gain as revenue. [IAS 16.68, IAS 38.113, IAS 40.69]. However, IAS 16 mentions an exception in the case of entities that are in the business of renting and subsequently selling the same assets (discussed at 4.3.1 below). [IAS 16.68A]. IFRS 16 applies to disposal via a sale and leaseback. [IAS 16.69, IAS 38.113, IAS 40.67].

The gain or loss on disposal of a non-financial asset is the difference between the net disposal proceeds, if any, and the carrying amount of the item. [IAS 16.71, IAS 38.113, IAS 40.69]. Under IAS 16 or IAS 38, if an entity applies the revaluation model for measurement after initial recognition, any revaluation surplus relating to the asset disposed of is transferred within equity to retained earnings when the asset is derecognised and not reflected in profit or loss. [IAS 16.41, IAS 38.87].

As noted above, IAS 16, IAS 38 and IAS 40 provide a consistent model for the measurement and recognition of gains or losses on the sale or disposal of non-financial assets to non-customers (i.e. not in the ordinary course of business) by referring to the requirements in IFRS 15. For sales of non-financial assets to non-customers, IAS 16, IAS 38 and IAS 40 require entities to:

• determine the date of disposal (and, therefore, derecognition of the asset) using the requirements in IFRS 15 for determining when a performance obligation is satisfied (i.e. Step 5 requirements, see Chapter 30); [IAS 16.69, IAS 38.114, IAS 40.67] and
• measure the consideration that is included in the calculation of the gain or loss on disposal in accordance with the requirements for determining the transaction price (i.e. Step 3 requirements, see Chapter 29 at 2). Any subsequent changes to the estimate of the consideration (e.g. updates of variable consideration estimates, including reassessment of the constraint) are recognised in accordance with the requirements for changes in the transaction price. [IAS 16.72, IAS 38.116, IAS 40.70]. For example, if variable consideration is constrained at the time of disposal, it would not be recognised in profit or loss until it is no longer constrained, which could be in a subsequent period.

IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations – provides additional requirements for assets that meet that standard's criteria to be classified as held for sale. These requirements include measurement provisions, which may affect the measurement of the amount of the subsequent gain or loss on disposal. These are discussed in Chapter 4 at 2.2.

IFRS 10 specifies how a parent accounts for the full or partial disposal of a subsidiary (see Chapter 7 for further discussion).²⁰ The accounting treatment may, therefore, differ depending on whether a non-financial asset is sold on its own (in which case IAS 16, IAS 38 or IAS 40 would apply) or included within a full or partial disposal of a subsidiary (in which case IFRS 10 would apply). Where there is a retained interest in a former subsidiary, other IFRSs (such as IAS 28, IFRS 11 or IFRS 9) may also apply in accounting for the transaction.

Similar considerations may apply to disposals of non-financial assets held in a corporate wrapper that are in the ordinary course of business, since IFRS 15 excludes transactions within the scope of IFRS 10. See 3.5.1.J above for further discussion.

The FASB's ASC 610‑20 provides guidance on how to account for any gain or loss resulting from the sale of non-financial assets or in-substance non-financial assets that are not an output of an entity's ordinary activities and are not a business. This includes the sale of intangible assets and PP&E, including real estate, as well as materials and supplies. ASC 610‑20 requires entities to apply certain recognition and measurement principles of ASC 606. Thus, under US GAAP, the accounting for a contract that includes the sale of a non-financial asset to a non-customer will generally be consistent with a contract to sell a non-financial asset to a customer, except for financial statement presentation and disclosure. Sale or transfers of businesses or subsidiaries that do not contain solely non-financial assets and in-substance non-financial assets to non-customers are accounted for using the deconsolidation guidance in ASC 810 – Consolidation.

As discussed above, IAS 16, IAS 38 and IAS 40 require entities to use certain of the requirements of IFRS 15 when recognising and measuring gains or losses arising from the sale or disposal of non-financial assets when it is not in the ordinary course of business. Changes in a parent's ownership interest in a subsidiary (including loss of control through sale or disposal) are accounted for under IFRS 10. Unlike US GAAP, IFRS does not contain specific requirements regarding the sale of in-substance non-financial assets.

4.4 Regulatory assets and liabilities

In many countries, the provision of utilities (e.g. water, natural gas or electricity) to consumers is regulated by a government agency (regulators). The objective of this rate regulation is to ensure ‘quality, quantity and availability of supply’, as well as ‘stability, predictability and affordability of pricing’ for ‘goods or services that governments consider essential for a reasonable quality of life for their citizens and for which there are significant barriers to effective competition for supply’. Regulations differ between countries, but regulators may operate a cost-plus system under which a utility is allowed to make a fixed return on investment. Consequently, there is rate-adjustment mechanism to adjust the future price that a utility is allowed to charge its customers for variances between estimated and actual inputs to the rate calculation. Hence, this adjustment creates timing differences as the future price may be influenced by past cost levels and investment levels.

Under some national GAAPs (including US GAAP) accounting practices have been developed that allow an entity to account for the effects of regulation by recognising a ‘regulatory liability’ or ‘regulatory asset’ that reflects the decrease in future prices required by the regulator to compensate for an excessive return on investment, and vice versa where an increase would be permitted.

In September 2012, the Board decided to restart its rate-regulated activities project and issued a discussion paper in September 2014 aiming to develop an accounting model so that investors can compare the effects of rate regulation on the financial position, performance and cash flows of any entity with significant rate-regulated revenue.²¹ As an interim measure, the IASB issued IFRS 14 – Regulatory Deferral Accounts – to help entities who currently recognise rate-regulated assets and liabilities under their national GAAP adopt IFRS. That standard permits a first-time adopter of IFRS to continue to use its previous accounting policies for rate-regulated assets and liabilities, with specific disclosure requirements (see Chapter 5 for discussion on first-time adoption).

The Board is currently undertaking a standard-setting project to develop a new accounting model to provide users of financial statements with useful information about an entity's rights and obligations arising from a defined rate regulation that are not captured by existing IFRS requirements.

The possible accounting model being discussed by the IASB provides explanations for the term ‘defined rate regulation’ and proposes a ‘supplementary approach’. Under this approach, an entity would continue to apply existing IFRS standards, including IFRS 15, without modification (i.e. customer contracts perspective). The model would then be applied to provide information about the effects of the timing differences between when a transaction or event takes place and when some of the effects of that transaction or event are reflected in the rate (i.e. regulatory agreement perspective). The rights and obligations reflecting these timing differences that are incremental to those reported using existing IFRS standards (e.g. IFRS 15) would then be recognised in the statement of financial position as an asset or liability.²²

At its July 2019 meeting, the Board decided to publish its proposal for a new accounting model as an exposure draft of a new standard that would replace IFRS 14.²³ At the time of writing, it was expected to issue the exposure draft in the first half of 2020.²⁴ Until any new standard is issued and becomes effective, regulatory assets and liabilities are not eligible for recognition under IFRS, unless the entity is a first-time adopter that can apply IFRS 14. For further details see Chapter 17 at 11.1.