customer’s knowledge or objection to the change. For example, a contract may specify
that an entity cannot transfer a good to another customer because the customer has legal
title to the good. Such a contractual term would not be substantive if the entity could
physically substitute that good for another and could redirect the original good to
another customer for little cost. In that case, the contractual restriction would merely
be a protective right and would not indicate that control of the asset has transferred to
the customer. [IFRS 15.BC138]. As an example, the standard notes that contractual
restrictions are not substantive if an asset is largely interchangeable with other assets
that the entity could transfer to another customer without breaching the contract and
without incurring significant costs that otherwise would not have been incurred in
relation to that contract. [IFRS 15.B7].
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An entity also needs to consider any practical limitations on directing the asset for another
use. A significant economic loss could arise because the entity either would incur
significant costs to rework the asset or would only be able to sell the asset at a significant
loss. For example, an entity may be practically limited from redirecting assets that either
have design specifications that are unique to a customer or are located in remote areas.
[IFRS 15.B8]. In making this determination, the Board clarified that an entity considers the
characteristics of the asset that ultimately will be transferred to the customer and assesses
whether the asset in its completed state could be redirected without a significant cost of
rework. The Board provided an example of manufacturing contracts in which the basic
design of the asset is the same across all contracts, but substantial customisation is made
to the asset. As a result, redirecting the finished asset would require significant rework and
the asset would not have an alternative use because the entity would incur significant
economic losses to direct the asset for another use. [IFRS 15.BC138].
Considering the level of customisation of an asset may help entities assess whether an
asset has an alternative use. The IASB noted in the Basis for Conclusions that, when an
entity is creating an asset that is highly customised for a particular customer, it is less
likely that the entity could use that asset for any other purpose. [IFRS 15.BC135]. That is, it
is likely that the entity would need to incur significant rework costs to redirect the asset
to another customer or sell the asset at a significantly reduced price. As a result, the
asset would not have an alternative use to the entity and the customer could be regarded
as receiving the benefit of the entity’s performance as the entity performs (i.e. having
control of the asset), provided that the entity also has an enforceable right to payment
(discussed at 8.1.4.B below). However, the Board clarified that although the level of
customisation is a factor to consider, but it should not be a determinative factor. For
example, in some real estate contracts, the asset may be standardised (i.e. not highly
customised), but it still may not have an alternative use to the entity because of
substantive contractual restrictions that preclude the entity from readily directing the
asset to another customer. [IFRS 15.BC137].
The standard provides the following example to illustrate an evaluation of practical
limitations on directing an asset for another use. [IFRS 15.IE73-IE76].
Example 28.59: Asset has no alternative use to the entity
An entity enters into a contract with a customer, a government agency, to build a specialised satellite. The
entity builds satellites for various customers, such as governments and commercial entities. The design and
construction of each satellite differ substantially, on the basis of each customer’s needs and the type of
technology that is incorporated into the satellite.
At contract inception, the entity assesses whether its performance obligation to build the satellite is a
performance obligation satisfied over time in accordance with paragraph 35 of IFRS 15.
As part of that assessment, the entity considers whether the satellite in its completed state will have an
alternative use to the entity. Although the contract does not preclude the entity from directing the completed
satellite to another customer, the entity would incur significant costs to rework the design and function of the
satellite to direct that asset to another customer. Consequently, the asset has no alternative use to the entity
(see paragraphs 35(c), 36 and B6–B8 of IFRS 15) because the customer-specific design of the satellite limits
the entity’s practical ability to readily direct the satellite to another customer.
For the entity’s performance obligation to be satisfied over time when building the satellite, paragraph 35(c)
of IFRS 15 also requires the entity to have an enforceable right to payment for performance completed to
date. This condition is not illustrated in this example.
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Requiring an entity to assess contractual restrictions when evaluating this criterion may
seem to contradict the requirements in paragraph B4 of IFRS 15 to ignore contractual
and practical restrictions when evaluating whether another entity would need to
substantially reperform the work the entity has completed to date (see 8.1.2 above). The
Board explained that this difference is appropriate because each criterion provides a
different method for assessing when control transfers and the criteria were designed to
apply to different situations. [IFRS 15.BC139].
After contract inception, an entity does not update its assessment of whether an asset
has an alternative use for any subsequent changes in facts and circumstances, unless the
parties approve a contract modification that substantively changes the performance
obligation. [IFRS 15.36]. The IASB also decided that an entity’s lack of an alternative use
for an asset does not, by itself, mean that the customer effectively controls the asset.
The entity would also need to determine that it has an enforceable right to payment for
performance to date, as discussed below. [IFRS 15.BC141].
8.1.4.B
Enforceable right to payment for performance completed to date
To evaluate whether it has an enforceable right to payment for performance completed
to date, the entity is required to consider the terms of the contract and any laws or
regulations that relate to it. [IFRS 15.37, B12]. The standard states that the right to payment
for performance completed to date need not be for a fixed amount. However, at any
time during the contract term, an entity must be entitled to an amount that at least
compensates the entity for performance completed to date (as defined in paragraph B9
of IFRS 15), even if the contract is terminated by the customer (or another party) for
reasons other than the entity’s failure to perform as promised. [IFRS 15.37, B9]. The IASB
concluded that a customer’s obligation to pay for the entity’s performance is an indicator
that the customer has obtained benefit from the entity’s performance. [IFRS 15.BC142].
The standard clarifies that an amount that would compensate an entity for performance
completed to date would be an amount that a
pproximates the selling price of the goods
or services transferred to date (e.g. recovery of the costs incurred by an entity in
satisfying the performance obligation plus a reasonable profit margin), rather than
compensation for only the entity’s potential loss of profit if the contract were to be
terminated. [IFRS 15.B9].
Compensation for a reasonable profit margin need not equal the profit margin expected
if the contract was fulfilled as promised, but the standard states that an entity should be
entitled to compensation for either of the following amounts: [IFRS 15.B9]
• a proportion of the expected profit margin in the contract that reasonably reflects
the extent of the entity’s performance under the contract before termination by
the customer (or another party); or
• a reasonable return on the entity’s cost of capital for similar contracts (or the
entity’s typical operating margin for similar contracts) if the contract-specific
margin is higher than the return the entity usually generates from similar contracts.
The standard is clear that an entity’s right to payment for performance completed to
date need not be a present unconditional right to payment. In many cases, an entity will
have an unconditional right to payment only at an agreed-upon milestone or upon
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complete satisfaction of the performance obligation. Therefore, when assessing
whether it has a right to payment for performance completed to date, an entity is
required to consider whether it would have an enforceable right to demand or retain
payment for performance completed to date if the contract were to be terminated
before completion (for reasons other than the entity’s failure to perform as promised).
[IFRS 15.B10].
In some contracts, a customer may have a right to terminate the contract only at
specified times during the life of the contract or the customer might not have any right
to terminate the contract. The standard states that, if a customer acts to terminate a
contract without having the right to terminate the contract at that time (including when
a customer fails to perform its obligations as promised), the contract (or other laws)
might entitle the entity to continue to transfer the promised goods or services in the
contract to the customer and require the customer to pay the promised consideration.
In those circumstances, an entity has a right to payment for performance completed to
date because the entity has a right to continue to perform its obligations in accordance
with the contract and to require the customer to perform its obligations (which include
paying the promised consideration). [IFRS 15.B11].
The IASB described in the Basis for Conclusions how the factors of ‘no alternative use’
and the ‘right to payment’ relate to the assessment of control. Since an entity is
constructing an asset with no alternative use to the entity, the entity is effectively
creating an asset at the direction of the customer. That asset would have little or no
value to the entity if the customer were to terminate the contract. As a result, the entity
will seek economic protection from the risk of customer termination by requiring the
customer to pay for the entity’s performance to date in the event of customer
termination. The customer’s obligation to pay for the entity’s performance to date (or,
the inability to avoid paying for that performance) suggests that the customer has
obtained the benefits from the entity’s performance. [IFRS 15.BC142].
The enforceable right to payment criterion has two components that an entity must assess:
• the amount that the customer would be required to pay; and
• what it means to have the enforceable right to payment.
The Board provided additional application guidance on how to evaluate each of
these components.
Firstly, the Board explained in the Basis for Conclusions that the focus of the analysis
should be on the amount to which the entity would be entitled upon termination.
[IFRS 15.BC144]. This amount is not the amount the entity would settle for in a negotiation
and it does not need to reflect the full contract margin that the entity would earn if the
contract were completed. The Board clarified in paragraph B9 of IFRS 15 that a
‘reasonable profit margin’ would either be a proportion of the entity’s expected profit
margin that reasonably reflects the entity’s performance to date or a reasonable return
on the entity’s cost of capital. In addition, in paragraph B13 of IFRS 15, the standard
clarifies that including a payment schedule in a contract does not, in and of itself,
indicate that the entity has the right to payment for performance completed to date.
This is because, in some cases, the contract may specify that the consideration received
from the customer is refundable for reasons other than the entity failing to perform as
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promised in the contract. The entity must examine information that may contradict the
payment schedule and may represent the entity’s actual right to payment for
performance completed to date. As highlighted in the Example 28.61 below, payments
from a customer must approximate the selling price of the goods or services transferred
to date to be considered a right to payment for performance to date. A fixed payment
schedule may not meet this requirement. [IFRS 15.B13].
Secondly, the IASB added application guidance in paragraph B12 of IFRS 15 to help an
entity assess the existence and enforceability of a right to payment. In making this
assessment, entities need to consider any laws, legislation or legal precedent that could
supplement or override the contractual terms. [IFRS 15.B12]. Paragraph B12 of IFRS 15
states that the assessment includes consideration of:
‘(a) legislation, administrative practice or legal precedent confers upon the entity a
right to payment for performance to date even though that right is not specified in
the contract with the customer;
(b) relevant legal precedent indicates that similar rights to payment for performance
completed to date in similar contracts have no binding legal effect; or
(c) an entity’s customary business practices of choosing not to enforce a right to
payment has resulted in the right being rendered unenforceable in that legal
environment. However, notwithstanding that an entity may choose to waive its
right to payment in similar contracts, an entity would continue to have a right to
payment to date if, in the contract with the customer, its right to payment for
performance to date remains enforceable.’ [IFRS 15.B12].
Furthermore, the standard indicates that an entity may have an enforceable right to
payment even when the customer terminates the contract without having the right to
terminate. This would be the case if the contract (or other law) entitles the entity to
continue to transfer the goods or services promised in the contract and require the
customer to pay the consideration promised for those goods or services (often referred
to as ‘specific performance’). [IFRS 15.BC145]. The standard also states that even when an
entity chooses to waive its right to payment in other similar contracts, an entity would
continue to have a right to
payment for the contract if, in the contract, its right to
payment for performance to date remains enforceable.
The standard provides the following example to illustrate the concepts described
at 8.1.4 above. It depicts an entity providing consulting services that will take the form
of a professional opinion upon the completion of the services. In this example, the
entity’s performance obligation meets the no alternative use and right to payment
criterion in paragraph 35(c) of IFRS 15, as follows. [IFRS 15.IE69-IE72].
Example 28.60: Assessing alternative use and right to payment
An entity enters into a contract with a customer to provide a consulting service that results in the entity
providing a professional opinion to the customer. The professional opinion relates to facts and circumstances
that are specific to the customer. If the customer were to terminate the consulting contract for reasons other
than the entity’s failure to perform as promised, the contract requires the customer to compensate the entity
for its costs incurred plus a 15 per cent margin. The 15 per cent margin approximates the profit margin that
the entity earns from similar contracts.
The entity considers the criterion in paragraph 35(a) of IFRS 15 and the requirements in paragraphs B3
and B4 of IFRS 15 to determine whether the customer simultaneously receives and consumes the benefits of
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the entity’s performance. If the entity were to be unable to satisfy its obligation and the customer hired another
consulting firm to provide the opinion, the other consulting firm would need to substantially re-perform the
work that the entity had completed to date, because the other consulting firm would not have the benefit of
any work in progress performed by the entity. The nature of the professional opinion is such that the customer
will receive the benefits of the entity’s performance only when the customer receives the professional opinion.
Consequently, the entity concludes that the criterion in paragraph 35(a) of IFRS 15 is not met.
However, the entity’s performance obligation meets the criterion in paragraph 35(c) of IFRS 15 and is a
performance obligation satisfied over time because of both of the following factors:
(a) in accordance with paragraphs 36 and B6-B8 of IFRS 15, the development of the professional opinion
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 433
