Under IFRS 15, if a contract has a significant financing component (i.e., the timing of payments agreed upon in a contract provides the customer or the entity with a significant benefit of financing), the entity is required to adjust the amount of promised consideration to reflect the time value of money.

Here's how it works:

1. If a customer pays for goods or services in advance (before the goods or services are transferred), then the entity is effectively receiving financing from the customer. The entity must adjust the transaction price for this financing component. For example, suppose a machinery manufacturer receives an advance payment of $100,000 for a custom machine that will be delivered in two years. The manufacturer must discount the $100,000 to its present value and recognize that amount as revenue when control of the machine is transferred to the customer. The difference between the transaction price and the present value of the advance payment is recognized as interest income over the two-year period.
2. Conversely, if the entity provides goods or services to the customer before payment is due, the entity is effectively providing financing to the customer. In this case, the entity must also adjust the transaction price. For instance, if a software company licenses a software package to a customer for a period of three years but doesn't require payment until the end of the three-year period, the company is providing financing to the customer. The software company would discount the payment due in three years to its present value and recognize that amount as revenue at the beginning of the three-year license period. The difference between the payment due in three years and the present value of that payment is recognized as interest expense over the three-year period.

However, IFRS 15 also provides a practical expedient that no adjustment for a financing component is necessary if the period between when the goods or services are transferred and the payment is less than one year.

Let's consider an example where a company, say ABC Corp, enters into a contract with a customer to build a custom machine. The total transaction price is $1,200,000. However, the customer agrees to pay ABC Corp $600,000 upfront and the remaining $600,000 after two years.

Given the significant period between the time when ABC Corp transfers control of the machine to the customer and the time it receives the final payment, there is a significant financing component to consider under IFRS 15.

First, ABC Corp needs to establish a discount rate that reflects the financing arrangement. Let's say this rate is 5%.

Next, ABC Corp needs to calculate the present value of the $600,000 that it will receive after two years using this 5% discount rate. Using the formula for calculating the present value (PV = FV / (1 + r)^n), we find that the present value is approximately $541,600.

So, when ABC Corp transfers control of the machine to the customer, it will recognize $1,141,600 in revenue ($600,000 upfront payment + $541,600 present value of final payment). The difference between the final payment of $600,000 and its present value of $541,600, which amounts to $58,400, will be recognized as interest income over the two-year period.