IFRS 15 · Government & Public Sector

IFRS 15 Revenue Recognition for Government & Public Sector Contracts

Navigate the complex intersection of IFRS 15, IFRIC 12, and public sector accounting for grant-funded services, public-private partnerships, and government contract revenue.

Step 1: Identify the Contract

IFRS 15.9–21All five criteria must be met for a contract to exist
a
Have the parties approved the contract and are committed to perform their respective obligations?
IFRS 15.9(a)
Approval can be written, oral, or implied by customary business practice. Commitment means the parties intend to enforce their respective rights. Consider whether there is a signed agreement, purchase order, or established pattern of dealing that evidences approval.
b
Can the entity identify each party's rights regarding the goods or services to be transferred?
IFRS 15.9(b)
The contract must establish enforceable rights for each party. This includes identifying what goods or services the entity will transfer and what the customer is entitled to receive. Even if terms are implicit or established by customary business practice, rights must be identifiable.
c
Can the entity identify the payment terms for the goods or services to be transferred?
IFRS 15.9(c)
Payment terms include the amount, timing, and form of consideration. The terms need not be explicitly stated if they can be determined from customary business practices or the contract's terms and conditions. Consider fixed prices, variable elements, milestone payments, and credit terms.
d
Does the contract have commercial substance — that is, the risk, timing, or amount of the entity's future cash flows is expected to change as a result of the contract?
IFRS 15.9(d)
A contract has commercial substance when it is expected to change the entity's future cash flows. This criterion prevents entities from recognising revenue on reciprocal exchanges of goods or services of similar nature and value (e.g., barter transactions between oil companies to fulfil demand in different locations). Most arm's-length commercial transactions have commercial substance.
e
Is it probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services that will be transferred to the customer?
IFRS 15.9(e)
Assess the customer's ability and intention to pay. Consider the customer's credit history, financial condition, collateral or guarantees, and the entity's past experience with similar classes of customers. 'Probable' means more likely than not under IFRS. If the entity offers a price concession, assess collectability on the reduced (expected) amount, not the stated contract price (IFRS 15.9.A1).

Contract Combination Assessment

(Optional)
Are there multiple contracts with the same customer (or related parties) entered at or near the same time that should be combined?

Contract Modification Assessment

(Optional)
Scope Consideration

Service concession arrangements may fall under IFRIC 12 rather than IFRS 15. Non-exchange transactions (taxes, fines, unconditional grants) are outside IFRS 15 scope. Apply IPSAS 23 or local GAAP where applicable.

IFRS 15 Revenue Recognition for Government & Public Sector

IFRS 15 for Government Contracts requires navigating the intersection of commercial revenue standards with public procurement and concession frameworks.

Scope — IFRIC 12 Boundary: Service concession arrangements (private operator builds/operates public infrastructure under government control) fall under IFRIC 12, not IFRS 15. Both control conditions must be met (IFRIC 12.5). Operating services not part of the concession may still be IFRS 15.

Contract Identification: Government contracts may be signed but unfunded until budget appropriation. The contract may not be enforceable until funding is secured. Framework agreements need IFRS 15.17-18 analysis.

Variable Consideration: KPI bonuses, liquidated damages, performance-based adjustments. Government entities typically enforce penalties rigorously — constrain conservatively. Long-term PPP payment streams almost always contain a financing component.

Step 5 — Timing: Service contracts: over-time under IFRS 15.35(a). Infrastructure: over-time under IFRS 15.35(c). Milestone-based output methods often align with payment triggers but may not reflect linear progress.

Common Audit Pitfalls:

  • Misclassifying scope between IFRIC 12 and IFRS 15.
  • Recognising contracts before budget appropriation.
  • Understating penalty constraints (government enforces rigorously).
  • Ignoring financing components in long-term PPP streams.

Typical Contract Structures

Formal procurement frameworks with detailed specs, milestone payments, performance guarantees. Includes fixed-price, cost-plus, IDIQ frameworks, and 15-30 year PPP/PFI concessions with KPIs and clawback provisions.

Common Performance Obligations in Government & Public Sector

Service delivery Infrastructure construction Facility maintenance Training programmes IT system implementation

Regulatory Context

Public sector entities often apply IPSAS rather than IFRS. IPSAS 47 addresses exchange transactions similarly to IFRS 15. Private sector contractors apply IFRS 15 regardless of counterparty.

Worked Example: Government PPP — Hospital Design, Build, and FM Services

InfraCo enters a 25-year PPP to design, build, and operate a hospital. CU 200M for construction (years 1-3), CU 250M for FM services (years 4-25), CU 50M performance bonuses. Construction falls under IFRIC 12; FM services under IFRS 15.

Step 1: Identify the Contract

Construction meets IFRIC 12 criteria (government controls infrastructure). FM services in years 4-25 fall within IFRS 15. FM contract meets all IFRS 15.9 criteria.

Step 2: Identify Performance Obligations

Within FM: Hard FM (maintenance, systems) and Soft FM (cleaning, catering) are separately distinct. Two POs identified.

Step 3: Determine the Transaction Price

CU 250M fixed + CU 50M KPI bonuses (expected value: 80%, constrained to CU 35M). Total = CU 285M. No significant financing in quarterly FM payments.

Step 4: Allocate the Transaction Price

Hard FM SSP: CU 180M; Soft FM SSP: CU 120M. Allocated: Hard FM CU 171M; Soft FM CU 114M.

Step 5: Recognise Revenue

Hard FM: over-time, input method (cost-to-cost, lifecycle costs vary). Soft FM: over-time, straight-line (uniform effort). Reassess variable consideration quarterly.

IFRS 15 Revenue Recognition Audit Toolkit — free PDF

Complete audit toolkit: IFRS 15 five-step decision flowchart poster, contract assessment template, PO identification checklist, SSP allocation worksheet, and industry-specific application notes.

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Frequently Asked Questions

When does a government concession fall outside IFRS 15?
When IFRIC 12 applies — the grantor controls what services are provided, to whom, at what price, and controls residual interest. Both conditions must be met.
How should conditional government grants be treated?
Grants with performance conditions (enforceable deliverables) may be IFRS 15. Grants with mere use restrictions are typically IAS 20.
Can revenue be recognised before budget appropriation?
Generally no — IFRS 15.9(a) requires both parties to be committed. If the contract is contingent on future appropriation, enforceability may not be established.
How are KPI bonuses/penalties treated?
Variable consideration under IFRS 15.50. Government entities enforce penalties more rigorously — constrain at a higher threshold than commercial contracts.
How should contract modifications (scope changes) be handled?
Under IFRS 15.18-21. Government scope changes at below-SSP rates result in cumulative catch-up (IFRS 15.21(a)) or prospective treatment (IFRS 15.21(b)).

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