This free, guided checker walks your finance team through the key decision points for IFRS 15 Significant Financing Component. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level IFRS screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
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A significant financing component exists when the timing of payments agreed by the parties gives the customer or the entity a significant benefit of financing the transfer of goods or services (IFRS 15.60). The one-year practical expedient in IFRS 15.63 lets an entity ignore financing effects when, at contract inception, it expects the period between transfer and payment to be one year or less; it is an accounting policy applied consistently to similar contracts. Start by measuring that expected period against the transfer date.
The period to payment is one year or less at inception, so the entity applies the practical expedient and makes no financing adjustment (IFRS 15.63).
Official guidance: IFRS issued standards
Assess whether the payment timing provides a significant financing benefit to either party: extended credit after control transfers finances the customer, while a significant advance payment before performance finances the entity (IFRS 15.60). Compare the promised consideration to the price the customer would pay in cash at the point of transfer. Short timing gaps, customer-discretionary advances, and differences that arise for non-financing reasons are not financing (IFRS 15.62).
Payment timing does not provide a significant financing benefit, so no adjustment is made (IFRS 15.60-61).
Official guidance: IFRS issued standards
Weigh the significance factors in IFRS 15.61: the difference between the promised consideration and the cash selling price, and the combined effect of the expected time to payment and prevailing interest rates. Then check the exclusions in IFRS 15.62 (customer-discretion advances, variable consideration outside the parties control, and differences arising for reasons other than financing).
The financing effect is not significant after weighing size, duration, and interest rates, so no adjustment is required (IFRS 15.61-62).
Official guidance: IFRS issued standards
The expedient is available only when, at contract inception, the entity expects the period between transferring each promised good or service and the customer paying for it to be one year or less (IFRS 15.63). Assess it at inception and apply it consistently to the portfolio of similar contracts. A contract whose expected settlement exceeds one year cannot use the expedient and must have its transaction price adjusted for the time value of money (IFRS 15.64).
Apply the one-year practical expedient without adjusting the transaction price (IFRS 15.63).
Official guidance: IFRS issued standards
Adjust the transaction price so it reflects the cash selling price - the amount the customer would have paid in cash when control transferred (IFRS 15.61). For customer financing, discount the promised consideration to present value; for entity financing, accrete the advance. The trap is leaving the transaction price at its nominal amount, which misstates revenue and leaves interest buried inside it (IFRS 15.64).
Adjust the transaction price to the cash selling price using present value before allocating revenue (IFRS 15.61, IFRS 15.64).
Official guidance: IFRS issued standards
Under IFRS 15.64 the discount rate is the rate that would be reflected in a separate financing transaction between the entity and its customer at contract inception, reflecting the credit characteristics of the party receiving financing. It can often be identified as the rate that discounts the nominal consideration to the current cash selling price. The rate is not updated after inception for later changes in interest rates or credit risk.
Determine and document the discount rate for a separate financing transaction before computing present value (IFRS 15.64).
Official guidance: IFRS issued standards
Identify the direction of financing, because it drives presentation. Customer financing (extended payment terms after control transfers) produces a receivable that accretes to interest income; entity financing (a significant advance payment before performance) produces a contract liability that accretes to interest expense (IFRS 15.60, IFRS 15.65). Both are recognised over the financing period using the effective interest method.
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Official guidance: IFRS issued standards
Present the financing effect as interest income or interest expense on a line separate from revenue, recognised over the financing period using the effective interest method (IFRS 15.65). Build an amortisation schedule that accretes the receivable (customer financing) or the contract liability (entity financing) to its settlement amount. The common misapplication is netting the interest into revenue, which overstates the revenue line.
Present interest separately from revenue and recognise it using the effective interest method (IFRS 15.65).
Official guidance: IFRS issued standards
Allocate only the cash selling price of the goods or services to the performance obligations, so revenue excludes the financing element (IFRS 15.65). Confirm that allocated revenue plus the separately presented interest reconciles to the total contract consideration. The trap is allocating the full nominal consideration to performance obligations, which double-counts the financing benefit inside revenue.
Reallocate the transaction price to the cash selling price, excluding the financing element (IFRS 15.65).
Official guidance: IFRS issued standards
Initially measure the receivable or contract asset at its present value - the transaction price determined under IFRS 15.64, which equals the cash selling price - and then accrete it to the nominal amount as interest income using the effective interest method (IFRS 9.5.1.1, IFRS 9.5.4.1). Assess the receivable for expected credit losses under IFRS 9 separately from the financing measurement. The trap is booking the receivable at its face amount on initial recognition.
Measure the receivable at present value on initial recognition and accrete it thereafter (IFRS 15.64, IFRS 9.5.1.1).
Official guidance: IFRS issued standards
A change in the timing or amount of payments is a contract modification assessed under IFRS 15.18-21, which may require remeasurement of the financing component and related balances. Note that IFRS 15.64 prohibits updating the original discount rate for later changes in interest rates or the customer credit assessment; only a genuine modification changes the accounting.
Reassess the financing component as a contract modification when payment terms change (IFRS 15.18-21).
Official guidance: IFRS issued standards
Disclose the significant judgements made in adjusting the consideration for the time value of money (IFRS 15.126(a)) and, more broadly, the judgements affecting the amount and timing of revenue (IFRS 15.123). Interest income or expense is presented separately from revenue. Confirm the discount rate, significance assessment, and receivable effects are captured.
Significant financing component accounting and the related disclosures are complete (IFRS 15.65, IFRS 15.126). Complete the significant-judgement and interest disclosures before finalising (IFRS 15.123, IFRS 15.126).
Official guidance: IFRS issued standards
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