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performance obligations in a contract for the sale of a real estate unit that includes the
transfer of land, which is discussed in 5.2.1.B below.
5.2.1.A
Capable of being distinct
The first criterion requires that a promised good or service must be capable of being
distinct by providing a benefit to the customer either on its own or together with other
resources that are readily available to the customer.
The standard states that a customer can benefit from a good or service if the good or
service could be used, consumed, sold for an amount greater than scrap value or
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otherwise held in a way that generates economic benefits. A customer may be able to
benefit from some goods or services on their own or in conjunction with other readily
available resources. A readily available resource is a good or service that is sold
separately (by the entity or another entity) or a resource that the customer has already
obtained from the entity (including goods or services that the entity will have already
transferred to the customer under the contract) or from other transactions or events.
The fact that an entity regularly sells a good or service separately indicates that a
customer can benefit from that good or service on its own or with readily available
resources. [IFRS 15.28].
Determining whether a good or service is capable of being distinct is straightforward in
many situations. For example, if an entity regularly sells a good or service separately,
this fact would demonstrate that the good or service provides benefit to a customer on
its own or with other readily available resources.
The evaluation may require more judgement in other situations, particularly when the
good or service can only provide benefit to the customer with readily available
resources provided by other entities. These are resources that meet either of the
following conditions:
• they are sold separately by the entity (or another entity); or
• the customer has already obtained them from the entity (including goods or
services that the entity has already transferred to the customer under the contract)
or from other transactions or events.
As noted in the Basis for Conclusions, the assessment of whether the customer can
benefit from the goods or services (either on its own or with other readily available
resources) is based on the characteristics of the goods or services themselves instead of
how the customer might use the goods or services. [IFRS 15.BC100]. Consistent with this
notion, an entity disregards any contractual limitations that may prevent the customer
from obtaining those readily available resources from a party other than the entity when
making this assessment (as illustrated below in Example 28.22 at 5.2.3 below). The IFRS
Interpretations Committee also reiterated this point during its March 2018 meeting
(see 5.2.1.B below for further discussion).
In the Basis for Conclusions, the Board explained that ‘the attributes of being distinct
are comparable to the previous revenue recognition requirements for identifying
separate deliverables in a multiple-element arrangements, which specified that a
delivered item must have “value to the customer on a stand-alone basis” for an entity to
account for that item separately.’ However, the Board did not use similar terminology
in IFRS 15 so as to avoid implying that an entity must assess a customer’s intended use
for a promised good or service when it is identifying performance obligations. It
observed that it would be difficult, if not impossible, for an entity to know a customer’s
intent. [IFRS 15.BC101].
5.2.1.B
Distinct within the context of the contract
Once an entity has determined whether a promised good or service is capable of being
distinct based on the individual characteristics of the promise, the entity considers the
second criterion of whether the good or service is separately identifiable from other
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promises in the contract (i.e. whether the promise to transfer the good or service is
distinct within the context of the contract). The standard states that, when assessing
whether an entity’s promises to transfer goods or services to the customer are separately
identifiable from other promises in the contract, the objective is ‘to determine whether
the nature of the promise, within the context of the contract, is to transfer each of those
goods or services individually or, instead, to transfer a combined item or items to which
the promised goods or services are inputs. Factors that indicate that two or more
promises to transfer goods or services to a customer are not separately identifiable
include, but are not limited to, the following:
(a) The entity provides a significant service of integrating the goods or services with
other goods or services promised in the contract into a bundle of goods or services
that represent the combined output or outputs for which the customer has
contracted. In other words, the entity is using the goods or services as inputs to
produce or deliver the combined output or outputs specified by the customer. A
combined output or outputs might include more than one phase, element or unit.
(b) One or more of the goods or services significantly modifies or customises, or are
significantly modified or customised by, one or more of the other goods or services
promised in the contract.
(c) The goods or services are highly interdependent or highly interrelated. In other
words, each of the goods or services is significantly affected by one or more of the
other goods or services in the contract. For example, in some cases, two or more
goods or services are significantly affected by each other because the entity would
not be able to fulfil its promise by transferring each of the goods or services
independently.’ [IFRS 15.29].
Figure 28.7 depicts the above requirements:
Figure 28.7:
Distinct in the context of the contract
Is the good or service distinct in the context of the contract?
Evaluate whether the good or service is separately identifiable from other promises in the
contract. Factors to consider include:
Does the entity provide
Do one or more goods or
a significant service of
Are the goods or services
services significantly
integrating goods or
in the contract highly
modify or customise other
services with other goods
interdependent or highly
goods or services in the
or services in the contract?
contract?
interrelated?
(a) Separately identifiable principle
To determine whether promised goods or services are separately identifiable (i.e. whether
a promise to transfer a good or service is distinct within the context of the contract), an
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entity needs to evaluate whether its promise is to transfer each good or service
individually or a combined item (or items) that comprises the individual goods or services
promised in the contract. Therefore, an entity would evaluate whether the promised
goods or services in the contract are o
utputs or they are inputs to a combined item (or
items). In the Basis for Conclusions, the Board noted that, in many cases, a combined item
(or items) is more than (or substantially different from) the sum of the underlying promised
goods or services. [IFRS 15.BC116J].
The evaluation of whether an entity’s promise is separately identifiable considers the
relationship between the various goods or services in the context of the process to fulfil
the contract. Therefore, an entity considers the level of integration, interrelation or
interdependence among the promises to transfer goods or services. In the Basis for
Conclusions, the Board observed that, rather than considering whether one item, by its
nature, depends on the other (i.e. whether two items have a functional relationship), an
entity evaluates whether there is a transformative relationship between the two or more
items in the process of fulfilling the contract. [IFRS 15.BC116K]. The point was also
reiterated by the IFRS Interpretations Committee during its March 2018 meeting (see
discussion below).
The Board also emphasised that the separately identifiable principle is applied within
the context of the bundle of promised goods or services in the contract. It is not within
the context of each individual promised good or service. That is, the separately
identifiable principle is intended to identify when an entity’s performance in
transferring a bundle of goods or services in a contract is fulfilling a single promise to a
customer. Therefore, to apply the ‘separately identifiable’ principle, an entity evaluates
whether two or more promised goods or services significantly affect each other in the
contract (and are, therefore, highly interdependent or highly interrelated).
[IFRS 15.BC116L].
As an example of this evaluation, the IASB discussed in the Basis for Conclusions a
typical construction contract that involves transferring to the customer many goods or
services that are capable of being distinct (e.g. various building materials, labour, project
management services). In this example, the IASB concluded that identifying all of the
individual goods or services as separate performance obligations would be impractical
and would not faithfully represent the nature of the entity’s promise to the customer.
That is, the entity would recognise revenue when the materials and other inputs to the
construction process are provided rather than when it performs (and uses those inputs)
in the construction of the item the customer has contracted to receive (e.g. a building, a
house). As such, when determining whether a promised good or service is distinct, an
entity not only determines whether the good or service is capable of being distinct but
also whether the promise to transfer the good or service is distinct within the context
of the contract. [IFRS 15.BC102].
Paragraph 29 of IFRS 15 includes three factors (discussed individually below) that are
intended to help entities identify when the promises in a bundle of promised goods or
services are not separately identifiable and, therefore, should be combined into a single
performance obligation. [IFRS 15.29]. In the Basis for Conclusions, the IASB noted that
these three factors are not an exhaustive list and that not all of the factors need to exist
in order to conclude that the entity’s promises to transfer goods or services are not
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separately identifiable. As emphasised by the IFRS Interpretations Committee during its
March 2018 meeting (see discussion below), the three factors also are not intended to
be criteria that are evaluated independently of the separately identifiable principle.
Given the wide variety of arrangements that are within the scope of IFRS 15, the Board
expects that there are some instances in which the factors are less relevant to the
evaluation of the separately identifiable principle. [IFRS 15.BC116N]. Entities may need to
apply significant judgement to evaluate whether a promised good or service is
separately identifiable. The evaluation requires a thorough understanding of the facts
and circumstances present in each contract. An entity should consider the following
questions, which summarise what is discussed in the Basis for Conclusions:
[IFRS 15.BC116J-BC116L]
• Is the combined item greater than, or substantively different from, the sum of the
promised goods or services?
• Is an entity, in substance, fulfilling a single promise to the customer?
• Is the risk an entity assumes to fulfil its obligation to transfer a promised good or
service inseparable from the risk relating to the transfer of the other promised
goods or services in the bundle?
• Do two or more promised goods or services each significantly affect the other?
• Does each promised good or service significantly affect the other promised good
or service’s utility to the customer?
(i) Significant
integration
service
The first factor (included in paragraph 29(a) of IFRS 15) is the presence of a significant
integration service. [IFRS 15.29(a)]. The IASB determined that, when an entity provides a
significant service of integrating a good or service with other goods or services in a
contract, the bundle of integrated goods or services represents a combined output or
outputs. In other words, when an entity provides a significant integration service, the
risk of transferring individual goods or services is inseparable from the bundle of
integrated goods or services because a substantial part of an entity’s promise to the
customer is to make sure the individual goods or services are incorporated into the
combined output or outputs. [IFRS 15.BC107]. When evaluating this factor, entities need to
consider whether they are providing a significant integration service that effectively
transforms the individual promised goods or services (the inputs) into a combined
output(s), as discussed in Example 28.22, Case E (included in 5.2.3 below). This is
consistent with the notion discussed above that a combined item (or items) would be
greater than (or substantially different from) the sum of the underlying promised goods
or services.
This factor applies even if there is more than one output. Furthermore, as described in the
standard, a combined output or outputs may include more than one phase, element or unit.
In the Basis for Conclusions, the IASB noted that this factor may be relevant in many
construction contracts in which a contractor provides an integration (or contract
management) service to manage and coordinate the various construction tasks and to
assume the risks associated with the integration of those tasks. An integration service
provided by the contractor often includes coordinating the activities performed by any
subcontractors and making sure the quality of the work performed is in compliance with
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contract specifications and that the individual goods or services are appropriately
integrated into the combined item that the customer has contracted to receive.
[IFRS 15.BC107]. This type of construction contract and the analysis of whether it contains
a significant integration service is illustrated in Example 28.20, Case A (see 5.2.3 below).
<
br /> The Board also observed that this factor could apply to other industries as well.
[IFRS 15.BC108].
(ii) Significant modification or customisation
The second factor in paragraph 29(b) of IFRS 15 is the presence of significant
modification or customisation. [IFRS 15.29(b)]. In the Basis for Conclusions, the IASB
explained that in some industries, the notion of inseparable risks is more clearly
illustrated by assessing whether one good or service significantly modifies or customises
another. This is because if a good or service modifies or customises another good or
service in a contract, each good or service is being assembled together (as an input) to
produce a combined output. [IFRS 15.BC109].
In the Basis for Conclusions on IFRS 15, the Board provided the following example:
assume that an entity promises to provide a customer with software that it will
significantly customise to make the software function with the customer’s existing
infrastructure. Based on its facts and circumstances, the entity determines that it is
providing the customer with a fully integrated system and that the customisation service
requires it to significantly modify the software in such a way that the risks of providing
it and the customisation service are inseparable (i.e. the software and customisation
service are not separately identifiable). [IFRS 15.BC110].
The significance of modification or customisation services can affect an entity’s
conclusion about the number of identified performance obligations for similar fact
patterns. Consider Example 28.21, Case A and Case B (included in 5.2.3 below). In
Case A, each of the promised goods or services are determined to be distinct because
the installation services being provided to the customer do not significantly modify the
software. In Case B, two of the promised goods or services are combined into one
performance obligation because one promise (the installation) significantly customises
another promise (the software).
(iii) Highly interdependent or highly interrelated
The third factor in paragraph 29(c) of IFRS 15 is whether the promised goods or services
are highly interdependent or highly interrelated. [IFRS 15.29(c)]. This is often the most
difficult distinct factor for entities to assess and it is expected to be an area of focus for
entities and their stakeholders. Promised goods or services are highly interdependent or