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determining whether the contract is completed, Entity A only considers legacy IFRS. Entity A might have noted
that its accounting policy under IAS 18 did not focus on the identification of contract duration and, therefore,
perhaps the contract is neither a 24-month contract nor a month-to-month contract. Entity A had accounted for
this type of service contract based on monthly invoicing and, arguably, that accounting treatment is similar to
the accounting treatment of a month-to-month contract. However, while not explicitly stated, Entity A has
generally viewed the stated contractual term as the period over which the rights and obligations are enforceable.
Furthermore, Entity A cannot cancel the contract with the customer and is obliged to render services for the
entire contract period of 24 months, unless a termination notice is provided by the customer which would
limit Entity A’s obligation to provide services for the next 30 days from the notification date. Since no
cancellation notice had been submitted by the customer at least one month before 1 January 2017,
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approximately 18 months of services still need to be provided as at the beginning of the earliest period
presented (i.e. 1 January 2017). Therefore, Entity A concludes that the contract does not meet the definition
of a completed contract and would need to be transitioned to IFRS 15.
Scenario 2
Assume the same facts as Scenario 1, with the exception that the customer submitted an early termination
notice on 30 November 2016.
Similar to Scenario 1, the contract duration under legacy IFRS would have been the stated contractual term
of 24 months. However, in this scenario, the customer has submitted the termination notice on
30 November 2016. Therefore, Entity A concludes that the term of the contract ceases on 31 December 2016.
Entity A cannot cancel the contract with the customer and is obliged to render services for the entire contract
period of 24 months, unless a termination notice is provided by the customer which limits Entity A’s
obligation to provide service for the next 30 days from the notification date. Since Entity A had provided all
services prior to 31 December 2016, Entity A concludes that the contract is a completed contract. Entity A
continues to apply its legacy accounting policy (developed in accordance with IAS 18) to any remaining
consideration still to be recognised.
Scenario 3
Assume the same facts with Scenario 1, with the exception that the customer was required to pay a non-
refundable upfront fee of £50 at commencement of the contract (in addition to the monthly fixed fee). The
customer can cancel the contract at any time without penalty, but without having to provide any notice. The
customer cancelled the contract on 30 November 2016.
In its financial statements, Entity A’s accounting policy for these types of contracts under IAS 18 stated that
revenues from non-refundable upfront fees were deferred over the average customer retention period. The
customer retention period was estimated to be two years. Therefore, the deferred revenue was recognised as
revenue on a straight-line basis over the next 24 months.
Similar to Scenario 2, the contract duration under legacy IFRS would have been the stated contractual term
of 24 months. However, the customer had submitted the termination notice on 30 November 2016 and,
therefore, Entity A concludes that the term of the contract ceases on 31 December 2016.
Entity A’s legacy accounting policy for the non-refundable upfront fee refers to recognition of the deferred
income over average customer retention period, not the contractual term. The definition of a completed
contract is not dependent on all revenue being recognised, but rather on all goods and services being
transferred to the customer. Furthermore, the period over which revenue is recognised does not affect the
contract duration. As such, recognition of this upfront fee is not relevant in determining whether the contract
is a completed contract. All previously contracted services had been provided to the customer up to the date
of cancellation. Therefore, the contract is a completed contract.
Entity A continues applying its legacy accounting policy (developed in accordance with IAS 18) to any
remaining consideration still to be recognised. However, given that the customer has terminated the contract
early, Entity A needs to reassess, in line with the requirements of IAS 18, the period over which this remaining
revenue arising from the non-refundable upfront fee would be recognised.
2.3.2.C
Determination whether all goods or services have been transferred
When determining whether it has ‘transferred all goods or services’, an entity does not
consider the requirements of IFRS 15 for ‘transfer of control’. The IASB noted in the Basis
for Conclusions that ‘transferred all of the goods or services’ is not meant to imply that an
entity would apply the ‘transfer of control’ notion in IFRS 15 to goods or services that have
been identified in accordance with legacy IFRS. Rather, an entity is required to determine
whether it has transferred all the goods or services in accordance with the requirements
in legacy IFRS, as noted in paragraph BC441 of IFRS 15 (see 2.3.2.D below).
‘Consequently, in many situations the term “transferred” would mean “delivered” within
the context of contracts for the sale of goods and “performed” within the context of
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contracts for rendering services and construction contracts. In some situations, the
entity would use judgement when determining whether it has transferred goods or
services to the customer’. [IFRS 15.BC445D].
2.3.2.D
Some or all of revenue has not been recognised under legacy IFRS
If some or all of revenue has not been recognised under legacy IFRS, this could possibly
prevent the contract from being completed.
The definition of a completed contract is not dependent on an entity having
recognised all related revenue. However, the requirements in legacy IFRS with
respect to the timing of recognition may provide an indication of whether the goods
or services have been transferred.
IAS 18 provided the following five criteria, all of which needed to be satisfied in order
to recognise revenue from the sale of goods: [IAS 18.14]
• the entity had transferred to the buyer the significant risks and rewards of
ownership of the goods;
• the entity retained neither continuing managerial involvement to the degree
usually associated with ownership nor effective control over the goods sold;
• the amount of revenue could be measured reliably;
• it was probable that the economic benefits associated with the transaction would
flow to the entity; and
• the costs incurred or to be incurred in respect of the transaction could be
measured reliably.
IAS 18 viewed the passing of risks and rewards as the most crucial of the five criteria,
giving the following four examples of situations in which an entity may have retained
the significant risks and rewards of ownership: [IAS 18.16]
• when the entity retained an obligation for unsatisfactory performance not covered
by normal warranty provisions;
• when the receipt of the revenue from a particular sale was contingent on the
• when the goods were shipped subject to installation and the installation was a
significant part of the contract which had not yet been completed by the
entity; and
• when the buyer had the right to rescind the purchase for a reason specified in the
sales contract and the entity was uncertain about the probability of return.
Understanding the reasons for the accounting treatment under legacy IFRS may,
therefore, assist entities in determining whether the goods or services have been
transferred and the completed contract definition has been met. However, judgement
may be needed in respect of some goods or services. Assume, for example, that an entity
sells products, but cannot recognise revenue immediately. The delayed recognition of
revenue may be because of factors related to the timing of transfer, such as a bill-and-
hold arrangement, or because the goods or services have been transferred, but not all
of the criteria for recognition have been met.
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2.3.2.E
Delayed recognition of revenue due to collectability concerns
If collectability concerns were the only reason for delaying recognition of revenue
under legacy IFRS (i.e. because it was not probable that the economic benefits
associated with the transaction would flow to the entity), [IAS 18.14(d)], it would not
prevent a contract from meeting the definition of a completed contract. However, it is
important to ensure that this is the only reason for the delay in recognition. Consider
the following examples:
Example 28.2: Definition of completed contract: collectability
Scenario 1
In November 2016, Entity A entered into a contract with a customer to deliver 1,000 products with immediate
delivery. Because of the customer’s poor credit history, Entity A agreed that the customer could pay for 60%
of the products on the date of delivery and the remaining 40% within 60 days of the delivery date. Under its
previous accounting policy (in accordance with paragraph 14 of IAS 18), Entity A only recognised revenue
for 60% of the consideration and deferred recognition of the remaining 40% until it was probable that this
amount would be collected (provided the other criteria in paragraph 14 of IAS 18 were met). Collectability
of the remaining 40% of the consideration became probable at the end of January 2017.
Assume that Entity A adopted IFRS 15 on 1 January 2018 and used the full retrospective method to transition.
Entity A also uses the practical expedient in paragraph C5(a)(ii) of IFRS 15 not to restate contracts that meet
the definition of a completed contract, as defined in paragraph C2(b) of IFRS 15 at the beginning of the
earliest period presented.
At the beginning of the earliest period presented (i.e. 1 January 2017; Entity A presents one comparative
period only), Entity A had transferred all goods identified in the contract by delivering 1,000 products to the
customer and had recognised 60% of the revenue. Although Entity A could only partially recognise the
revenue from the sale of the 1,000 products (because it was not probable whether it would collect 40% of the
consideration), this does not affect the determination of whether the identified goods were transferred to the
customer. Therefore, Entity A considers the contract as completed. Entity A continues to account for the
contract in accordance with its legacy accounting policy (developed in accordance with IAS 18).
Scenario 2
In January 2016, Entity A entered into a contract with a customer to construct a highly specialised system on
the customer’s premises that was expected to be completed within 11 months. The consideration of $100,000
took into account the particularities of the customer’s specific premises. The repayment schedule
corresponded to the performance completed to date and Entity A applied the percentage of completion
method in accordance with paragraph 25 of IAS 11, recognising revenue in the accounting period in which
the relevant services were rendered.
Upon completion of the highly specialised system, Entity A had collected the consideration of $100,000 and
recognised an equal amount as revenue. However, in October 2016, while executing the construction
activities, Entity A incurred unexpected additional costs to adjust the initial design of the highly specialised
system due to certain changes in the customer’s premises that had not been communicated at contract
inception. Entity A filed a claim for these unexpected costs, requesting an increase in the consideration of
$1,000. The construction was completed in November 2016. In February 2017, Entity A agreed with its
customer to settle the claim at an amount of $500 to be paid within three months.
Assume that Entity A adopted IFRS 15 on 1 January 2018 and used the full retrospective method to transition.
Entity A also used the practical expedient in paragraph C5(a)(ii) of IFRS 15 not to restate contracts that meet
the definition of a completed contract as defined in paragraph C2(b) of IFRS 15 at the beginning of the earliest
period presented.
At the beginning of the earliest period presented (i.e. 1 January 2017), Entity A had transferred all goods and
services identified in the contract by completing the construction and delivering the highly specialised system
to the customer. The fact that Entity B had submitted a claim for additional consideration for the identified
goods and services that had already been transferred to the customer is not relevant when determining whether
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the identified goods or services have been transferred. Therefore, Entity A considers the contract as
completed. Entity A continues to account for the contract in accordance with its legacy accounting policy
(developed in accordance with IAS 11).
2.3.2.F
Transfer of a licence under legacy IFRS
Legacy IFRS provides limited guidance to assist entities in determining when a licence
of intellectual property is transferred (i.e. when the significant risks and rewards of
ownership of the licence transfer to the customer in accordance with paragraph 14(a) of
IAS 18). [IAS 18.14(a)]. Therefore, entities will need to use significant judgement to
determine whether a contract involving the licence of intellectual property meets the
definition of a completed contract.
Paragraph 33 of IAS 18 stated that ‘royalties accrue in accordance with the terms of the
relevant agreement and are usually recognised on that basis unless, having regard to the
substance of the agreement, it is more appropriate to recognise revenue on some other
systematic and rational basis’. [IAS 18.33]. Paragraph IE20 of IAS 18 stated that ‘fees and
royalties paid for the use of an entity’s assets (such as trademarks, patents, software,
music copyright, record masters and motion picture films) are normally recognised in
accordance with the substance of the agreement. As a practical matter, this may be on
a straight-line basis over the life of the agreement, for example, when a licensee has the
right to use certain technology for a specified period of time. ... In some cases, whether
or not a licence fee or royalty will be received is contingent on the occurrence of a
future event. In such cases, revenue is recognised only when it is probable that the fee
&
nbsp; or royalty will be received, which is normally when the event has occurred’. [IAS 18.IE20].
Since the guidance provided in this paragraph and the illustrative examples to IAS 18
focused on the recognition of revenue, it may be difficult to determine when the entity
transferred the significant risks and rewards of ownership to the customer. If an entity
has recognised revenue over time under legacy IFRS, it needs to carefully assess the
reason for this treatment.
It may be helpful to assess whether or not there are remaining or ongoing obligations
related to the licence, as discussed in paragraph IE20 of IAS 18:
• If the licence of intellectual property is an in-substance sale and there were no
remaining obligations to perform, it is likely that the significant risks and rewards
of ownership will have transferred to the customer at the time of sale.
As discussed in paragraph IE20 of IAS 18: ‘An assignment of rights for a fixed fee
or non-refundable guarantee under a non-cancellable contract which permits the
licensee to exploit the rights under the licence freely and the licensor has no
remaining obligations to perform is, in substance, a sale. An example is a licensing
agreement for the use of software when the licensor has no obligations subsequent
to delivery. Another example is the granting of rights to exhibit a motion picture
film in markets where the licensor has no control over the distributor and expects
to receive no further revenues from the box office receipts. In such cases, revenue
is recognised at the time of sale’. [IAS 18.IE20].
• In all other instances, an entity needs to use judgement to determine when the
licensee can exploit the rights under the license freely and the licensor has no
remaining obligations to perform. This may be helpful in understanding whether
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the ongoing obligations mean that the significant risks and rewards of ownership
did not pass at a single point in time, but over a period of time. Furthermore, this
assessment could help in determining whether it is over the entire licence period
or a shorter period and might include considering factors such as:
• the reason that the contract is cancellable (if applicable);
• the nature of any restrictions over use of the intellectual property. For example,