International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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entity expects the following:
CU
Transaction price
1,000,000
Expected costs
700,000
Expected profit (30%)
300,000
At contract inception, the entity excludes the CU200,000 bonus from the transaction price because it cannot
conclude that it is highly probable that a significant reversal in the amount of cumulative revenue recognised
will not occur. Completion of the building is highly susceptible to factors outside the entity’s influence,
including weather and regulatory approvals. In addition, the entity has limited experience with similar types
of contracts.
The entity determines that the input measure, on the basis of costs incurred, provides an appropriate measure
of progress towards complete satisfaction of the performance obligation. By the end of the first year, the
entity has satisfied 60 per cent of its performance obligation on the basis of costs incurred to date
(CU420,000) relative to total expected costs (CU700,000). The entity reassesses the variable consideration
and concludes that the amount is still constrained in accordance with paragraphs 56-58 of IFRS 15.
Consequently, the cumulative revenue and costs recognised for the first year are as follows:
CU
Revenue 600,000
Costs 420,000
Gross profit
180,000
In the first quarter of the second year, the parties to the contract agree to modify the contract by changing the
floor plan of the building. As a result, the fixed consideration and expected costs increase by CU150,000 and
CU120,000, respectively. Total potential consideration after the modification is CU1,350,000 (CU1,150,000
fixed consideration + CU200,000 completion bonus). In addition, the allowable time for achieving the
CU200,000 bonus is extended by 6 months to 30 months from the original contract inception date. At the date
of the modification, on the basis of its experience and the remaining work to be performed, which is primarily
inside the building and not subject to weather conditions, the entity concludes that it is highly probable that
including the bonus in the transaction price will not result in a significant reversal in the amount of cumulative
revenue recognised in accordance with paragraph 56 of IFRS 15 and includes the CU200,000 in the
transaction price.
In assessing the contract modification, the entity evaluates paragraph 27(b) of IFRS 15 and concludes (on the
basis of the factors in paragraph 29 of IFRS 15) that the remaining goods and services to be provided using
the modified contract are not distinct from the goods and services transferred on or before the date of contract
modification; that is, the contract remains a single performance obligation.
Consequently, the entity accounts for the contract modification as if it were part of the original contract (in
accordance with paragraph 21(b) of IFRS 15). The entity updates its measure of progress and estimates that
it has satisfied 51.2 per cent of its performance obligation (CU420,000 actual costs incurred ÷ CU820,000
total expected costs). The entity recognises additional revenue of CU91,200 [(51.2 per cent complete ×
CU1,350,000 modified transaction price) – CU600,000 revenue recognised to date] at the date of the
modification as a cumulative catch-up adjustment.
(C) Finally, a change in a contract may also be treated as a combination of the two: a
modification of the existing contract and the creation of a new contract.
In this case, an entity would not adjust the accounting treatment for completed
performance obligations that are distinct from the modified goods or services. However,
the entity would adjust revenue previously recognised (either up or down) to reflect the
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effect of the contract modification on the estimated transaction price allocated to
performance obligations that are not distinct from the modified portion of the contract
and would update the measure of progress.
See 11.1.1.E below for a discussion on how an entity would account for a contract asset
that exists when a contract is modified if the modification is treated as the termination
of an existing contract and the creation of a new contract.
4.4.3
Implementation questions on contract modifications
4.4.3.A
Reassessing the contract criteria if a contract is modified
When an arrangement that has already been determined to meet the standard’s
contract criteria is modified, would an entity need to reassess whether that
arrangement still meets the criteria to be considered a contract within the scope of
the model in the standard? There is no specific requirement in the standard to
reconsider whether a contract meets the definition of a contract when it is modified.
However, if a contract is modified, we believe that may indicate that ‘a significant
change in facts and circumstances’ has occurred (see 4.1 above) and that the entity
should reassess the criteria in paragraph 9 of IFRS 15 for the modified contract. Any
reassessment is prospective in nature and would not change the conclusions
associated with goods or services already transferred. That is, an entity would not
reverse any receivables, revenue or contract assets already recognised under the
contract because of the reassessment of the contract criteria in paragraph 9 of IFRS 15.
However, due to the contract modification accounting (see 4.4.2 above), the entity
may need to adjust contract assets or cumulative revenue recognised in the period of
the contract modification.
See 5.6.1.H below for a discussion on how an entity would account for the exercise of a
material right. See 9.1.5.A below for a discussion on how entities would account for
modifications to licences of intellectual property.
4.5
Arrangements that do not meet the definition of a contract
under the standard
If an arrangement does not meet the criteria to be considered a contract under the
standard, the standard specifies how to account for it. The standard states that when a
contract with a customer does not meet the criteria in paragraph 9 of IFRS 15 (i.e. the
criteria discussed at 4.1 above) and an entity receives consideration from the customer,
the entity shall recognise the consideration received as revenue only when either of the
following events has occurred:
(a) the entity has no remaining obligations to transfer goods or services to the
customer and all, or substantially all, of the consideration promised by the
customer has been received by the entity and is non-refundable; or
(b) the contract has been terminated and the consideration received from the
customer is non-refundable. [IFRS 15.15].
The standard goes on to specify that an entity shall recognise the consideration received
from a customer as a liability until one of the events described above occurs or until the
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contract meets the criteria to be accounted for within the revenue model. [IFRS 15.16].
Figure 28.5 illustrates this requirement:
Figure 28.5:
Arrangements that do not meet the definition of a contract under
the standard
Does the arrangement meet the
Apply the remaining steps
criteria in IF
RS 15 to be considered a Yes
of the model to the
contract within the scope of the
contract (Steps 2-5)
model in IFRS 15?*
No
No
Is the consideration received from
the customer non-refundable?
Yes
Has the entity fulfilled its remaining
obligations to the customer and has Yes
all (or substantially all) of the
consideration promised by the
customer been received?
No
Yes
Recognise consideration
Has the contract been terminated?
received as revenue
No
Recognise consideration received as
a liability
Entities need to continue to assess the criteria throughout the term of
* the arrangement to determine whether they are subsequently met.
Entities are required to continue to assess the criteria in paragraph 9 of IFRS 15
throughout the term of the arrangement to determine whether they are subsequently
met. Once the criteria are met, the model in the standard applies, rather than the
requirements discussed below. [IFRS 15.14]. If an entity determines that the criteria in
paragraph 9 of IFRS 15 are subsequently met, revenue is recognised on a cumulative
catch-up basis as at the date when a contract exists within the scope of the model
(i.e. at the ‘contract establishment date’, reflecting the performance obligations that
are partially, or fully, satisfied at that date. This accounting is consistent with the
discussion in TRG agenda paper no. 33, which states that the cumulative catch-up
method ‘best satisfies the core principle’ in paragraph 2 of IFRS 15.27 See 8.2.4.F below
for further discussion.
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If an arrangement does not meet the criteria in paragraph 9 of IFRS 15 (and until the
criteria are met), an entity only recognises non-refundable consideration received as
revenue when one of the events outlined above has occurred (i.e. full performance and
all (or substantially all) consideration received or the contract has been terminated) or
the arrangement subsequently meets the criteria in paragraph 9 of IFRS 15.
Until one of these events happens, any consideration received from the customer is
initially accounted for as a liability (not revenue) and the liability is measured at the
amount of consideration received from the customer.
In the Basis for Conclusions, the Board indicated that it intended this accounting to be
‘similar to the “deposit method” that was previously included in US GAAP and applied
when there was no consummation of a sale.’ [IFRS 15.BC48].
As noted in the Basis for Conclusions, the Board decided to include the requirements in
paragraphs 14-16 of IFRS 15 (discussed above) to prevent entities from seeking
alternative guidance or improperly analogising to the model in IFRS 15 in circumstances
in which an executed contract does not meet the criteria in paragraph 9 of IFRS 15.
[IFRS 15.BC47].
Under the FASB’s standard, when the arrangement does not meet the criteria to be
accounted for as a revenue contract under the standard, an entity can also recognise
revenue (at the amount of the non-refundable consideration received) when the entity
has transferred control of the goods or services and has stopped transferring (and has
no obligation to transfer) additional goods or services.
IFRS 15 does not include a similar requirement. However, the IASB states in the Basis
for Conclusions on IFRS 15 that contracts often specify that an entity has a right to
terminate the contract in the event of non-payment. Furthermore, such clauses would
not generally affect the entity’s legal rights to recover any amounts due. Therefore, the
IASB concluded that the requirements in IFRS 15 would allow an entity to conclude that
a contract is terminated when it stops providing goods or services to the customer.
[IFRS 15.BC46H].
4.5.1
Implementation questions on arrangements that do not meet the
definition of a contract under the standard
4.5.1.A
Determining when a contract is terminated for the purpose of applying
paragraph 15(b) of IFRS 15
Determining whether a contract is terminated may require significant judgement. In
the Basis for Conclusions on IFRS 15, ‘the IASB noted that contracts often specify that
an entity has the right to terminate the contract in the event of non-payment by the
customer and that this would not generally affect the entity’s rights to recover any
amounts owed by the customer. The IASB also noted that an entity’s decision to stop
pursuing collection would not typically affect the entity’s rights and the customer’s
obligations under the contract with respect to the consideration owed by the
customer. On this basis, ... the existing requirements in IFRS 15 are sufficient for an
entity to conclude ... that a contract is terminated when it stops providing goods or
services to the customer.’ [IFRS 15.BC46H].
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5
IFRS 15 – IDENTIFY THE PERFORMANCE OBLIGATIONS
IN THE CONTRACT
To apply the standard, an entity must identify the promised goods or services within the
contract and determine which of those goods or services are separate performance
obligations. As noted in the Basis for Conclusions, the Board developed the notion of a
‘performance obligation’ to assist entities with appropriately identifying the unit of
account for the purposes of applying the standard. [IFRS 15.BC85]. Because the standard
requires entities to allocate the transaction price to performance obligations, identifying
the correct unit of account is fundamental to recognising revenue on a basis that
faithfully depicts the entity’s performance in transferring the promised goods or services
to the customer.
With respect to identifying the performance obligations in a contract, the standard states
that, at contract inception, an entity is required to assess the goods or services promised
in a contract to identify performance obligations. A performance obligation is either:
[IFRS 15.22]
(a) a good or service (or a bundle of goods or services) that is distinct; or
(b) a series of distinct goods or services that are substantially the same and that have
the same pattern of transfer to the customer.
The standard goes on to clarify that a series of distinct goods or services has the same
pattern of transfer to the customer if both of the following criteria are met: [IFRS 15.23]
• each distinct good or service in the series that the entity promises to transfer to the
customer would meet the criteria to be a performance obligation satisfied over
time (see 8.1 below); and
• the same method would be used to measure the entity’s progress towards complete
satisfaction of the performance obligation to transfer each distinct good or service
in the series to the customer.
5.1
Identifying the promised goods or services in the contract
As a first step in identifying the performance obligation(s) in the contract, the standard
requires an entity to identify, at contract inception, the promised goods o
r services in
the contract. However, unlike legacy IFRS, which did not define elements/deliverables,
IFRS 15 provides guidance on the types of items that may be goods or services promised
in the contract.
‘A contract with a customer generally explicitly states the goods or services that an
entity promises to transfer to a customer. However, the performance obligations
identified in a contract with a customer may not be limited to the goods or services that
are explicitly stated in that contract. This is because a contract with a customer may also
include promises that are implied by an entity’s customary business practices, published
policies or specific statements if, at the time of entering into the contract, those promises
create a valid expectation of the customer that the entity will transfer a good or service
to the customer.’ [IFRS 15.24].
‘Performance obligations do not include activities that an entity must undertake to fulfil
a contract unless those activities transfer a good or service to a customer. For example,
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a services provider may need to perform various administrative tasks to set up a
contract. The performance of those tasks does not transfer a service to the customer as
the tasks are performed. Therefore, those setup activities are not a performance
obligation.’ [IFRS 15.25].
Identifying which promised goods or services are distinct is very important. The
standard includes the following examples of promised goods or services: [IFRS 15.26]
• sale of goods produced by an entity (e.g. inventory of a manufacturer);
• resale of goods purchased by an entity (e.g. merchandise of a retailer);
• resale of rights to goods or services purchased by an entity (e.g. a ticket resold by
an entity acting as a principal – see 5.4 below);
• performing a contractually agreed-upon task (or tasks) for a customer;
• providing a service of standing ready to provide goods or services (e.g. unspecified
updates to software that are provided on a when-and-if-available basis –
see 5.1.2.B below) or of making goods or services available for a customer to use as
and when the customer decides;
• providing a service of arranging for another party to transfer goods or services to a