whether it is a characteristic of the licence itself (e.g. the countries covered by
the licence) or restricts the licensor’s ability to use the rights received (e.g. the
licensor cannot use the intellectual property before a specified date); or
• the nature of any remaining obligations and the period in/over which those
obligations apply.
Consider the following examples:
Example 28.3: Definition of completed contract: licences
Scenario 1
On 1 January 2016, Entity A entered into a three-year contract that granted rights to exhibit a film at cinemas
and allowed for multiple showings within a specific period for a non-refundable upfront fee of £9,000. The
delivery of the film was the only activity that Entity A was obliged to perform in the contract and there was
no further involvement or other obligations for Entity A. The film was delivered to the customer on
1 January 2016 and Entity A concluded that the significant risks and rewards of ownership transferred to the
customer on that date.
Entity A’s legacy IFRS accounting policy for this type of contracts stated that revenue was recognised in full
upon commencement of the licence period, because that was the first point at which the customer had the
risks and rewards of ownership and all the criteria for revenue recognition were met at that date.
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.
According to Entity A’s previous accounting policy, revenue was recognised in full upon commencement of
the licence period (i.e. on 1 January 2016) and Entity A had no further involvement beyond that point.
Therefore, at the beginning of the earliest period presented (i.e. 1 January 2017), the contract is completed.
Entity A continues to account for the contract in accordance with its legacy accounting policy (developed in
accordance with IAS 18).
Scenario 2
Assume the same facts as Scenario 1, with the exception that the fee was contingent upon the occurrence of
a future event, specifically the purchase price was based on a percentage of the box office receipts during the
contract term (i.e. three years).
Entity A concluded that the significant risks and rewards of ownership transferred to the customer on
1 January 2016, when the film was delivered.
The existence of a sales-based royalty earned over a two-year period does not affect the timing of transfer to
the customer because Entity A had no further obligations to perform. The licence fee is contingent on box
office receipts. In such cases, paragraph IE20 of IAS 18 stated ‘revenue is recognised only when it is probable
that the fee or royalty will be received, which is normally when the event has occurred.’
However, this does not give rise to an additional obligation for Entity A. Therefore, it does not affect the
timing of transfer to the customer.
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Therefore, at the beginning of the earliest period presented (i.e. 1 January 2017), the contract is completed.
Entity A continues to account for the contract in accordance with its legacy accounting policy (developed in
accordance with IAS 18).
Scenario 3
Assume the same facts with Scenario 1, with the exception that, along with the delivery of the film, Entity A
supported the promotion of the films through promotional and marketing campaigns for a period of 18 months
after the film was delivered to the customer.
Entity A’s legacy IFRS accounting policy for this type of contracts stated that ‘promotional and marketing
campaigns are not separately identifiable components in a contract in which it grants rights to exhibit and
broadcast films. Revenue is recognised as the promotional and marketing campaigns are performed on a
straight-line basis over the period of the licence.’
Entity A concluded that, while the film was delivered on 1 January 2016, the significant risks and rewards of
ownership of the deliverable (i.e. the film and services, together) did not transfer to the customer until the
services were provided (i.e. 30 June 2017).
The contract included multiple components because Entity A had to provide promotional support services in
addition to the delivery of the licence. However, Entity A had considered paragraph 13 of IAS 18 and
determined that these services were not separately identifiable components to which revenue needed to be
allocated. Instead, revenue was recognised for both the licence and the promotional support services during
the licence period, as Entity A provided the services.
The contract is not considered completed because Entity A has to transfer additional services after transferring
the right to exhibit the film. The fact that Entity A had not separately allocated the consideration to each
component in the contract does not relieve it from its obligations to undertake the promotional activities over
the following 18 months.
Therefore, at the beginning of the earliest period presented (i.e. 1 January 2017), Entity A still had to
perform and provide the remaining promotional support services to the customer up to 30 June 2017.
Accordingly, the contract does not meet the definition of a completed contract. The contract needs to be
transitioned to IFRS 15.
2.3.2.G
Transfer of loyalty points under legacy IFRS
Under legacy IFRS, an entity would not have ‘transferred’ loyalty points granted to a
customer until the points were redeemed or expired.
Entities will need to carefully assess their loyalty programmes as points typically arose
from several contracts with the same customer(s). Since IFRIC 13 required that such
programmes be treated as a revenue element in a contract rather than a cost accrual, a
contract would not be considered complete until the loyalty points arising from that
contract have been redeemed or have expired.
Entities that operate loyalty programmes may face practical challenges in determining
which contracts gave rise to unexpired and unused loyalty points and, therefore, which
contracts are not yet completed (and must be transitioned to IFRS 15). Some entities
may have data within their systems that assist them in identifying those contracts for
each customer. However, if an entity has not specifically tracked such information by
customer, the terms and conditions of the loyalty programme may assist entities in
understanding whether/when points expire in order to identify the likely timing of the
original transaction that gave rise to the point(s). Furthermore, it may help to understand
whether the entity used a first-in-first-out approach to the utilisation of loyalty points
or some other approach.
Revenue
1991
Consider the following examples:
Example 28.4: Definition of completed contract: loyalty programmes
Entity A sells goods to retail customers. The customers can enter into a loyalty programme such that when
they purchase goods, they receive 1 loyalty point for every €100 spent on goods purchased from Entity A.
Customers can redeem their accumulated loyalty points for discounts on future
purchases from Entity A.
When redeemed, 1 point entitles the customer to a €1 discount, which is assumed to be the fair value of each
loyalty point. Points awarded expire in two years from the award day.
Entity A recognises revenue from sales of goods when customers buy them at the point of sale. According to
IFRIC 13, Entity A allocated the fair value of the consideration received or receivable in respect of the initial
sale between the award points and the initial good sold.
On 1 November 2016, Entity A sold €10,000 worth of goods and granted 100 loyalty points to a customer. Using
a relative fair value approach, Entity A allocated €9,901 to the sale of goods and €99 to the loyalty points. The
revenue from the sale of goods was recognised immediately. However, revenue recognition for the loyalty points
was deferred until the points were exercised or expired. On 1 January 2017, the customer had not used the points.
Assume that Entity A adopted IFRS 15 on 1 January 2018 and uses the full retrospective approach 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) IFRS 15 at the beginning of
the earliest period presented (i.e. 1 January 2017; Entity A presents on comparative period only).
As at the beginning of the earliest period presented, Entity A concludes that the loyalty points have not yet
been exercised or expired.
At the beginning of the earliest period presented (i.e. 1 January 2017), Entity A had delivered the goods to
the customer that triggered the award of the unredeemed loyalty points. However, at that date, Entity A had
not yet performed in relation to the loyalty points that represented a separately identifiable component of the
initial sale transactions in which they were granted. Therefore, the contract does not meet the definition of a
completed contract. The contract needs to be transitioned to IFRS 15.
2.3.3
Full retrospective adoption
Entities electing the full retrospective adoption must apply the provisions of IFRS 15 to
each period presented in the financial statements in accordance with IAS 8 –
Accounting Policies, Changes in Accounting Estimates and Errors, subject to the
practical expedients created to provide relief. The requirements of IAS 8 are discussed
in Chapter 3.
Under the full retrospective method, entities have to apply IFRS 15 as if it had been
applied since the inception of all its contracts with customers that are presented in the
financial statements. That is, an entity electing the full retrospective method has to
transition all of its contracts with customers to IFRS 15 (subject to the practical expedients
described below), not just those that are not considered completed contracts as at the
beginning of the earliest period presented. This means that for contracts that were
considered completed (as defined) before the beginning of the earliest period, an entity
still needs to evaluate the contract under IFRS 15 in order to determine whether there was
an effect on revenue recognised in any of the years presented in the period of initial
application (unless an entity elects to use one of the practical expedients described below).
During deliberations on the original standard, the IASB seemed to prefer the full
retrospective method, under which all contracts with customers are recognised and
measured consistently in all periods presented within the financial statements,
regardless of when the contracts were entered into. This method also provides users of
the financial statements with useful trend information across all periods presented.
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However, to ease the potential burden of applying it on a fully retrospective basis, the
IASB provided relief. An entity may use one or more of the following practical
expedients when applying this standard retrospectively:
‘(a) for completed contracts, an entity need not restate contracts that:
(i) begin and end within the same annual reporting period; or
(ii) are completed contracts at the beginning of the earliest period presented.
(b) for completed contracts that have variable consideration, an entity may use the
transaction price at the date the contract was completed rather than estimating
variable consideration amounts in the comparative reporting periods.
(c) for contracts that were modified before the beginning of the earliest period
presented, an entity need not retrospectively restate the contract for those
contract modifications in accordance with paragraphs 20-21. Instead, an entity
shall reflect the aggregate effect of all of the modifications that occur before the
beginning of the earliest period presented when:
(i) identifying the satisfied and unsatisfied performance obligations;
(ii) determining the transaction price; and
(iii) allocating the transaction price to the satisfied and unsatisfied performance
obligations.
(d) for all reporting periods presented before the date of initial application, an entity
need not disclose the amount of the transaction price allocated to the remaining
performance obligations and an explanation of when the entity expects to
recognise that amount as revenue (see paragraph 120).’ [IFRS 15.C5].
While the practical expedients provide some relief, an entity still needs to use
judgement and make estimates. For example, an entity needs to use judgement in
estimating stand-alone selling prices when there has been a wide range of selling prices
and when allocating the transaction price to satisfied and unsatisfied performance
obligations if there have been several performance obligations or contract modifications
over an extended period. Furthermore, if an entity applies the practical expedient for
contract modifications, it is still required to apply the standard’s contract modification
requirements (see 4.4 below) to modifications made after the beginning of the earliest
period presented under IFRS 15 (e.g. modifications made after 1 January 2017 for an
entity with a December year-end that adopts the standard using the full retrospective
method and presents one comparative period only).
Example 28.5: Transition practical expedient for contract modifications
Entity A entered into a contract with a customer to sell equipment for £1 million and provide services for five
years for £20,000 annually.
The equipment was delivered on 1 January 2013 and the service contract commenced at that time. The
equipment and the service contract are separate performance obligations.
In 2015, the contract was modified to extend it by five years and to provide an additional piece of equipment for
£1 million. The additional equipment will be delivered during 2018 and is a separate performance obligation.
Entity A elects to apply the practical expedient on contract modifications in accordance with
paragraph C5(c) IFRS 15.
Revenue
1993
The total transaction price for the modified contract is £2,200,000 [£1 million (equipment) + £1 million
(equipment) + (10 years × £20,000 (service))], which is allocated to the two products and the service contracts
based on the relative stand-alone selling price of each performance obligation. See 7 below for discussion on
alloc
ating the transaction price to performance obligations.
The transaction price allocated to the second piece of equipment and the remaining unperformed services
would be recognised when or as they are transferred to the customer.
The FASB’s standard includes a similar practical expedient for contract modifications
at transition for entities that elect to apply the full retrospective method. Entities would
also apply the FASB’s practical expedient to all contract modifications that occur before
the beginning of the earliest period presented under the standard in the financial
statements. However, this could be a different date for IFRS preparers and US GAAP
preparers depending on the number of comparative periods included within an entity’s
financial statements (e.g. US GAAP preparers often include two comparative periods in
their financial statements).
Unlike IFRS 15, the FASB’s standard does not allow an entity that uses the full
retrospective method to apply ASC 606 only to contracts that are not completed (as
defined) as at the beginning of the earliest period presented.
An entity that elects to apply the standard retrospectively must also provide the
disclosures required in IAS 8, as follows:
‘(a) the title of the IFRS;
(b) when applicable, that the change in accounting policy is made in accordance with
its transitional provisions;
(c) the nature of the change in accounting policy;
(d) when applicable, a description of the transitional provisions;
(e) when applicable, the transitional provisions that might have an effect on future periods;
(f) for the current period and each prior period presented, to the extent practicable,
the amount of the adjustment.
(i) for each financial statement line item affected; and
(ii) if
IAS
33
– Earnings per Share – applies to the entity, for basic and diluted
earnings per share;
(g) the amount of the adjustment relating to periods before those presented, to the
extent practicable; and
(h) if retrospective application is impracticable for a particular prior period, or for
periods before those presented, the circumstances that led to the existence of that
condition and a description of how and from when the change in accounting policy
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 393
