“FRS 115”: Singapore’s Revenue Recognition Blueprint

In the intricate world of accounting and finance, accurate and transparent reporting is paramount. This is where Financial Reporting Standards (FRS) come into the picture. These standards guide accountants and […]

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FRS 115

In the intricate world of accounting and finance, accurate and transparent reporting is paramount. This is where Financial Reporting Standards (FRS) come into the picture. These standards guide accountants and financial professionals, providing a framework for consistent and reliable financial reporting across industries.

At the heart of these standards lies the objective of presenting a precise financial picture to stakeholders – from investors and creditors to regulatory bodies. It is about providing insights that influence business strategies, aid in economic decisions, and ensure regulatory compliance.

FRS 115 – ‘Revenue from Contracts with Customers is a standard that has dramatically impacted accounting practices. Introduced by the Accounting Standards Council (ASC), FRS 115 has redefined how businesses recognise revenue from customer contracts.

Before FRS 115, revenue recognition rules were scattered across several standards and interpretations, creating complexity and sometimes inconsistency in revenue reporting. Recognising this gap, ASC developed FRS 115 as a comprehensive model for revenue recognition. Its inception was a significant step towards aligning local standards with the global International Financial Reporting Standards (IFRS).

FRS 115 is not merely an accounting standard but a transformational shift that brings about greater consistency, comparability, and transparency in financial reporting. It provides a robust yet flexible framework for recognising revenue, ensuring that the economic reality of a transaction is adequately reflected in the financial statements.

As we delve deeper into this blog post, we will unravel the specifics of FRS 115, its applicability, and its far-reaching implications on business practices. Whether you are an accounting professional, a business owner, or a stakeholder interested in financial reports, understanding FRS 115 will equip you with the knowledge to interpret financial information accurately and make informed decisions.

Please stay with us as we begin this journey to understand FRS 115 – the game changer in revenue recognition.

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Exploring FRS 115

To begin our exploration of FRS 115, it is crucial to grasp the essence of this standard. The Financial Reporting Standard 115, or FRS 115, is “Revenue from Contracts with Customers.” This standard has emerged as a comprehensive model for revenue recognition, offering a five-step framework organisations must follow when determining when and how to recognise revenue.

FRS 115 applies to all contracts with customers, except for lease contracts, insurance contracts, financial instruments, specific guarantee contracts and non-monetary exchanges between entities in the same line of business. The standard presents a more detailed view of an organisation’s revenue-earning activities while ensuring consistency across industries and geographical markets.

To appreciate the gravity of FRS 115, let’s take a quick look back at the past. Before FRS 115, revenue recognition was governed by different standards and interpretations. This included FRS 11 “Construction Contracts”, FRS 18 “Revenue”, INT FRS 31 “Revenue – Barter Transactions Involving Advertising Services”, and INT FRS 115 “Agreements for the Construction of Real Estate”.

Each of these prior standards and interpretations had its own set of rules for recognising revenue, which often resulted in inconsistencies and complexities in financial reporting. For instance, companies could recognise revenue from similar transactions and events differently, which hindered comparability across companies and industries. Moreover, some of these rules were perceived as overly detailed, with many exceptions, which led to further difficulties in understanding and applying them.

With the advent of FRS 115, the Accounting Standards Council sought to eliminate these inconsistencies and complexities by providing a comprehensive revenue recognition model that applies to all contracts with customers. FRS 115 replaces all the previous revenue recognition standards and interpretations and offers a more structured approach to revenue recognition.

The main differences introduced by FRS 115 include a new five-step model for revenue recognition, extensive disclosure requirements, and additional guidance on numerous topics, such as contract modifications and identifying performance obligations. Additionally, FRS 115 requires entities to recognise revenue when (or as) they satisfy a performance obligation by transferring a promised good or service to a customer.

In summary, FRS 115 is a significant advancement from the previous standards. It aims to reduce complexity, increase consistency, and improve comparability in financial reporting across companies and industries. The adoption of FRS 115 signifies a crucial shift towards more transparent and detailed financial reporting that gives stakeholders a better understanding of an entity’s revenue-earning activities.

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The Scope of FRS 115

Before you dive into the technicalities of FRS 115, we should know its applicability. As a sweeping standard, FRS 115 applies to a broad range of sectors and types of contracts. However, the overarching principle of this standard is that it applies to all contracts with customers, save for a few exceptions.

Key sectors impacted by FRS 115 include technology, telecommunications, real estate, manufacturing, retail, and professional services. In these sectors, contracts with customers form the bedrock of their revenue recognition. As a result, FRS 115 brings about consistency and transparency that was previously unseen across these sectors.

The types of contracts FRS 115 applies to are wide-ranging. They can include the sale of goods, provision of services, licenses of intellectual property, construction contracts, and more. FRS 115 also covers multiple-element arrangements, such as contracts that combine a product with an accompanying service.

Just to let you know, FRS 115 doesn’t include certain contracts in its scope. These include lease contracts, insurance contracts, financial instruments, and specific guarantee contracts, all covered by other specific standards.

Now that we have understood the applicability of FRS 115 let’s delve into the heart of this standard – the five-step model for recognising revenue.

  1. Identify the contract(s) with a customer: A contract is an agreement between two or more parties that creates enforceable rights and obligations.
  2. Identify the performance obligations in the contract: A performance obligation is a promise to transfer a distinct good or service to the customer.
  3. Determine the transaction price: The transaction price is the amount of consideration an entity expects to be entitled to in exchange for transferring promised goods or services to a customer.
  4. Allocate the transaction price to the performance obligations in the contract: The transaction price is allocated to each performance obligation based on the relative stand-alone selling prices of each distinct good or service promised in the contract.
  5. Recognise revenue when (or as) the entity satisfies a performance obligation: Revenue is recognised when the entity satisfies a performance obligation by transferring a promised good or service to the customer.

This five-step model ensures a systematic and consistent approach to revenue recognition, irrespective of the industry or the complexity of the contract. Furthermore, each step is geared towards ensuring that the revenue recognised depicts the transfer of promised goods or services to customers, mirroring the economic reality of the transaction.

In the following sections, we’ll explore the implications and challenges of adopting this five-step model under FRS 115, offering a comprehensive understanding of this pivotal standard.

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Implications of FRS 115

Implementing FRS 115, as with any new standard, has brought about far-reaching implications for businesses across various sectors. It has affected how organisations recognise revenue and several aspects of their financial statements and business practices.

Financial Statement Impact

Under FRS 115, the timing and pattern of revenue recognition might differ from previous standards, impacting the profit and loss statement. For example, depending on the specifics of a contract, entities might recognise revenue earlier or later than before.

The balance sheet is also affected as FRS 115 introduces new asset and liability definitions related to customer contracts. For example, entities may need to record contract assets or liabilities based on performance obligations.

Furthermore, FRS 115 requires more detailed and comprehensive disclosures in financial statements. This includes qualitative and quantitative information about contracts with customers, significant judgments, and changes in contract asset and liability balances.

Impact on Business Practices

FRS 115 is not just an accounting change; it impacts multiple areas of business operations. As a result, business practices, such as sales, contracting, financial planning, tax planning, and IT systems, may need to be revised to align with FRS 115 requirements.

Entities may need to modify their IT systems to capture additional data required under FRS 115, particularly to meet the new disclosure requirements. Sales and marketing practices might also need revisiting, as FRS 115 could impact how entities negotiate contracts, structure sales incentives, and even price their products or services.


Illustrating the Impact: A Case Study

Let’s look at a case study of a software company to illustrate the impact of FRS 115. Under the previous standards, a software company selling bundled products (software and post-contract support) might have recognised revenue when the software was delivered. The revenue from the post-contract support would then be recognised over the support period.

However, under FRS 115, the company must identify each performance obligation in the contract. If the software and support are distinct, the company must allocate the transaction price to each obligation based on their stand-alone selling prices. The revenue for the software might be recognised earlier when the software is delivered, but the revenue for the support must be recognised over the support period.

This change can significantly affect the timing of revenue recognition, leading to changes in reported revenue and profit. It could also impact the entity’s contractual negotiations, pricing strategies, and performance metrics.

In conclusion, FRS 115 has considerable implications for financial statements and business practices. Adapting to these changes requires an entity-wide approach and a deep understanding of the standard’s principles and requirements. As we transition towards FRS 115, we must be ready to embrace these changes and the opportunities that come with them.

Transition to FRS 115

Transitioning to a new accounting standard is no small feat; it involves thorough planning, adequate resources, and meticulous execution. FRS 115 recognises these complexities and provides transition guidance and practical expedients to facilitate the process.

Transition Guidance and Practical Expedients

FRS 115 offers two methods for transitioning – the complete retrospective method and the modified retrospective method.

Under the complete retrospective method, entities apply FRS 115 to each prior reporting period presented and adjust the opening balance of retained earnings for the earliest period presented. This method allows for better comparability across periods but may require significant effort to restate prior periods.

On the other hand, the modified retrospective method involves applying FRS 115 only to contracts that are not completed at the date of initial application. The cumulative effect of initially applying FRS 115 is recognised at the date of initial application. This method is less burdensome but can lead to less comparability across periods.

FRS 115 also provides several practical expedients to reduce the transition burden. These expedients, only available under certain conditions, allow entities to simplify some aspects of the transition process. For example, they include provisions for contract modifications, completed contracts, variable considerations, and more.

Challenges and Overcoming Them

Transitioning to FRS 115 comes with several challenges. Entities may need to gather additional data and modify their IT systems to meet the new recognition and disclosure requirements. In addition, contracts may need to be reviewed and renegotiated, and business practices and internal controls might require changes.

Moreover, staff would need to be trained in the new standard, and stakeholders would need to be educated about the potential impact on financial results.

Overcoming these challenges requires a comprehensive and entity-wide approach. Here are some strategies:

  1. Develop a Transition Plan: Start with a detailed plan that outlines the steps needed to transition to FRS 115, the resources required, and the timeline for implementation.
  2. Engage Cross-Functional Teams: Transitioning to FRS 115 is not just an accounting exercise. It affects multiple business areas, so it involves teams from across the entity, including finance, IT, sales, and legal.
  3. Conduct a Gap Analysis: Review your current revenue recognition practices and identify the changes needed to comply with FRS 115.
  4. Invest in Training: Train your staff on FRS 115 to understand the new standard and how it affects their roles and responsibilities.
  5. Communicate with Stakeholders: Keep your stakeholders informed about the transition process and how FRS 115 might affect your financial statements.
  6. Seek Expert Assistance: You should consider engaging an expert or consultant to help you through the transition process, especially for complex contracts or transactions.

In conclusion, transitioning to FRS 115 is a significant endeavour. Still, with the proper planning and execution, entities can embrace this new standard and enjoy the benefits of enhanced transparency and comparability in financial reporting.

FRS 115 and International Standards

One of the critical aims of financial reporting standards, like FRS 115, is to ensure comparability and understanding across borders. A global economy must have robust, consistent, and harmonised accounting standards. With this in mind, let’s delve into the relationship between FRS 115 and its international counterpart, IFRS 15.

Comparing FRS 115 and IFRS 15

FRS 115, titled ‘Revenue from Contracts with Customers’, closely aligns with IFRS 15, the International Financial Reporting Standard with the same title. FRS 115 and IFRS 15 were introduced to replace a set of older and often confusing revenue recognition standards and interpretations.

The core principle underpinning FRS 115 and IFRS 15 is that an entity recognises revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Both standards lay out a five-step model to achieve this principle:

  1. Identify the contract(s) with a customer.
  2. Identify the performance obligations in the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to the performance obligations in the contract.
  5. Recognise revenue when (or as) the entity satisfies a performance obligation.

FRS 115 and IFRS 15 also share identical requirements regarding the disclosures about revenue from contracts with customers, contract costs, and the remaining performance obligations.

Alignment of FRS 115 with International Accounting Practices

The striking similarity between FRS 115 and IFRS 15 is by design. The Accounting Standards Council of Singapore (ASC), which issues the FRS standards, has expressed its commitment to keep Singapore’s accounting standards closely modelled on international standards, specifically the IFRS. This alignment enhances Singapore’s attractiveness as a global business hub by ensuring that financial statements prepared under FRS are internationally understood and comparable.

The alignment of FRS 115 with IFRS 15 offers numerous benefits. It eases the process for multinational corporations and companies with cross-border transactions. It also facilitates investors, lenders, and other stakeholders understand and compare financial statements of entities in Singapore with those in other parts of the world.

In conclusion, FRS 115 mirrors IFRS 15, reflecting Singapore’s commitment to aligning its financial reporting standards with internationally recognised ones. This alignment ensures consistency, comparability, and a high level of transparency in financial reporting globally, fostering trust and confidence in Singapore’s financial reporting regime.

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In our journey through this post, we have taken a comprehensive look at FRS 115, a significant standard that has reshaped the landscape of revenue recognition in accounting. Through its principle-based framework and the application of a five-step model, FRS 115 has provided a much-needed uniform approach to revenue recognition across various sectors and types of contracts.

FRS 115 has not only transformed how businesses recognise revenue but also brought about changes in financial statements, business practices, and even IT systems. Bringing about greater consistency and transparency has improved comparability across entities and promoted confidence in financial reporting.

Our exploration of FRS 115’s transition guidance and practical expedients highlighted the provisions made to facilitate the changeover. Despite the challenges in transitioning to FRS 115, we discussed how businesses can successfully navigate these hurdles through strategic planning, cross-functional collaboration, and focused training.

Furthermore, we saw the alignment of FRS 115 with IFRS 15, reflecting Singapore’s commitment to adhering to internationally recognised accounting standards. This alignment is crucial in today’s globalised economy, enabling stakeholders worldwide to understand and compare financial statements easily and trustfully.

Financial reporting standards like FRS 115 are dynamic in the dynamic business world. Instead, they evolve in response to changes in the business environment, technological advancements, and stakeholders’ needs. Therefore, staying updated with these changing standards is vital for compliance, operational efficiency, and business success.

As we conclude, it’s important to remember that understanding and applying FRS 115 is not just about compliance. It’s about embracing the principles underlying the standard, recognising its value in transparency and comparability, and leveraging it to provide high-quality financial reporting. So as we move forward in this era of FRS 115, let’s strive to understand it and truly appreciate its role in our financial reporting landscape.



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