Revenue – ifrs 15 handbook

Using an interest rate that is explicitly specified in the contract 
may not be appropriate
IFRS 15.BC239–BC241
It may not be appropriate to use an interest rate that is explicitly specified in the 
contract, because the entity might offer below-market financing as a marketing 
incentive. Consequently, an entity applies the rate that would be used in a 
separate financing transaction between the entity and its customer that does 
not involve the provision of goods or services.
This can lead to practical difficulties for entities with large volumes of customer 
contracts and/or multinational operations, because they will have to determine 
a specific discount rate for each customer, class of customer or geographical 
region of customer.
Interest income recognised from a significant financing 
component may be presented as ‘revenue’ but not ‘revenue from 
contracts with customers’
IFRS 15.65, BC246–BC247
An entity that regularly enters into contracts with customers that include 
financing components may earn interest income in the course of its ordinary 
activities. If so, then it may present interest income arising from a significant 
financing component as a type of revenue in the statement of profit or loss. 
However, this interest income has to be presented separately from revenue 
from contracts with customers.
Advance payments may affect EBITDA
When an entity receives an advance payment that includes a significant 
financing component, it increases the amount of revenue recognised, with 
a corresponding increase in interest expense. This results in an increase in 
earnings before interest, taxes, depreciation and amortisation (EBITDA), which 
may affect compensation and other contractual arrangements.

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3 Step 3 – Determine the transaction price | 73
3.2 Significant financing component
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