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does not create an asset with alternative use to the entity because the professional opinion relates to facts
and circumstances that are specific to the customer. Therefore, there is a practical limitation on the
entity’s ability to readily direct the asset to another customer.
(b) in accordance with paragraphs 37 and B9-B13 of IFRS 15, the entity has an enforceable right to payment
for its performance completed to date for its costs plus a reasonable margin, which approximates the
profit margin in other contracts.
Consequently, the entity recognises revenue over time by measuring the progress towards complete
satisfaction of the performance obligation in accordance with paragraphs 39-45 and B14-B19 of IFRS 15.
Example 28.61 illustrates a contract in which the fixed payment schedule is not
expected to correspond, at all times throughout the contract, to the amount that would
be necessary to compensate the entity for performance completed to date. Accordingly,
the entity concludes that it does not have an enforceable right to payment for
performance completed to date as follows. [IFRS 15.IE77-IE80].
Example 28.61: Enforceable right to payment for performance completed to date
An entity enters into a contract with a customer to build an item of equipment. The payment schedule in
the contract specifies that the customer must make an advance payment at contract inception of 10 per cent
of the contract price, regular payments throughout the construction period (amounting to 50 per cent of
the contract price) and a final payment of 40 per cent of the contract price after construction is completed
and the equipment has passed the prescribed performance tests. The payments are non-refundable unless
the entity fails to perform as promised. If the customer terminates the contract, the entity is entitled only
to retain any progress payments received from the customer. The entity has no further rights to
compensation from the customer.
At contract inception, the entity assesses whether its performance obligation to build the equipment is a
performance obligation satisfied over time in accordance with paragraph 35 of IFRS 15.
As part of that assessment, the entity considers whether it has an enforceable right to payment for performance
completed to date in accordance with paragraphs 35(c), 37 and B9–B13 of IFRS 15 if the customer were to
terminate the contract for reasons other than the entity’s failure to perform as promised. Even though the
payments made by the customer are non-refundable, the cumulative amount of those payments is not
expected, at all times throughout the contract, to at least correspond to the amount that would be necessary to
compensate the entity for performance completed to date. This is because at various times during construction
the cumulative amount of consideration paid by the customer might be less than the selling price of the
partially completed item of equipment at that time. Consequently, the entity does not have a right to payment
for performance completed to date.
Because the entity does not have a right to payment for performance completed to date, the entity’s
performance obligation is not satisfied over time in accordance with paragraph 35(c) of IFRS 15.
Accordingly, the entity does not need to assess whether the equipment would have an alternative use to the
entity. The entity also concludes that it does not meet the criteria in paragraph 35(a) or (b) of IFRS 15 and
thus, the entity accounts for the construction of the equipment as a performance obligation satisfied at a point
in time in accordance with paragraph 38 of IFRS 15.
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Example 28.62 contrasts similar situations and illustrates when revenue would be
recognised over time (see 8.1 above) versus at a point in time (see 8.3 below).
Specifically, this example illustrates the evaluation of the ‘no alternative use’ and ‘right
to payment for performance to date’ concepts, as follows. [IFRS 15.IE81-IE90].
Example 28.62: Assessing whether a performance obligation is satisfied at a point
in time or over time
An entity is developing a multi-unit residential complex. A customer enters into a binding sales contract with
the entity for a specified unit that is under construction. Each unit has a similar floor plan and is of a similar
size, but other attributes of the units are different (for example, the location of the unit within the complex).
Case A – Entity does not have an enforceable right to payment for performance completed to date
The customer pays a deposit upon entering into the contract and the deposit is refundable only if the entity fails
to complete construction of the unit in accordance with the contract. The remainder of the contract price is
payable on completion of the contract when the customer obtains physical possession of the unit. If the customer
defaults on the contract before completion of the unit, the entity only has the right to retain the deposit.
At contract inception, the entity applies paragraph 35(c) of IFRS 15 to determine whether its promise to
construct and transfer the unit to the customer is a performance obligation satisfied over time. The entity
determines that it does not have an enforceable right to payment for performance completed to date because,
until construction of the unit is complete, the entity only has a right to the deposit paid by the customer.
Because the entity does not have a right to payment for work completed to date, the entity’s performance
obligation is not a performance obligation satisfied over time in accordance with paragraph 35(c) of IFRS 15.
Instead, the entity accounts for the sale of the unit as a performance obligation satisfied at a point in time in
accordance with paragraph 38 of IFRS 15.
Case B – Entity has an enforceable right to payment for performance completed to date
The customer pays a non-refundable deposit upon entering into the contract and will make progress payments
during construction of the unit. The contract has substantive terms that preclude the entity from being able to
direct the unit to another customer. In addition, the customer does not have the right to terminate the contract
unless the entity fails to perform as promised. If the customer defaults on its obligations by failing to make
the promised progress payments as and when they are due, the entity would have a right to all of the
consideration promised in the contract if it completes the construction of the unit. The courts have previously
upheld similar rights that entitle developers to require the customer to perform, subject to the entity meeting
its obligations under the contract.
At contract inception, the entity applies paragraph 35(c) of IFRS 15 to determine whether its promise to
construct and transfer the unit to the customer is a performance obligation satisfied over time. The entity
determines that the asset (unit) created by the entity’s performance does not have an alternative use to the
entity because the contract precludes the entity from transferring the specified unit to another customer. The
entity does not consider the possibility of a contract termination in assessing whether the entity is able to
direct the asset to another customer.
The entity also has a right to payment for performance completed to date in accordance with paragraphs 37 and
B9-B13 of IFRS 15. This is because if the customer were to default on its obligations, the entity would have an
enforce
able right to all of the consideration promised under the contract if it continues to perform as promised.
Therefore, the terms of the contract and the practices in the legal jurisdiction indicate that there is a right to
payment for performance completed to date. Consequently, the criteria in paragraph 35(c) of IFRS 15 are met
and the entity has a performance obligation that it satisfies over time. To recognise revenue for that
performance obligation satisfied over time, the entity measures its progress towards complete satisfaction of
its performance obligation in accordance with paragraphs 39-45 and B14-B19 of IFRS 15.
In the construction of a multi-unit residential complex, the entity may have many contracts with individual
customers for the construction of individual units within the complex. The entity would account for each
contract separately. However, depending on the nature of the construction, the entity’s performance in
undertaking the initial construction works (i.e. the foundation and the basic structure), as well as the
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construction of common areas, may need to be reflected when measuring its progress towards complete
satisfaction of its performance obligations in each contract.
Case C – Entity has an enforceable right to payment for performance completed to date
The same facts as in Case B apply to Case C, except that in the event of a default by the customer, either the
entity can require the customer to perform as required under the contract or the entity can cancel the contract in
exchange for the asset under construction and an entitlement to a penalty of a proportion of the contract price.
Notwithstanding that the entity could cancel the contract (in which case the customer’s obligation to the entity
would be limited to transferring control of the partially completed asset to the entity and paying the penalty
prescribed), the entity has a right to payment for performance completed to date because the entity could also
choose to enforce its rights to full payment under the contract. The fact that the entity may choose to cancel
the contract in the event the customer defaults on its obligations would not affect that assessment (see
paragraph B11 of IFRS 15), provided that the entity’s rights to require the customer to continue to perform
as required under the contract (i.e. pay the promised consideration) are enforceable.
8.1.4.C
What to consider when assessing whether performance creates an asset
with no alternative use
In November 2016, members of the FASB TRG were asked to consider whether an
entity should consider the completed asset or the work in progress when assessing
whether its performance creates an asset with no alternative use under paragraph 35(c)
of IFRS 15.103 The FASB TRG members generally agreed that when an entity evaluates
whether its performance creates an asset with no alternative use, it should consider
whether it could sell the completed asset to another customer without incurring a
significant economic loss (i.e. whether it could sell the raw materials or work in process
to another customer is not relevant). This conclusion is supported by the Board’s
comment in the Basis for Conclusions ‘that an entity should consider the characteristics
of the asset that will ultimately be transferred to the customer’. [IFRS 15.BC136].
However, as discussed at 8.1.4.A above and in accordance with paragraph 36 of IFRS 15,
if the entity is contractually restricted or has a practical limitation on its ability to direct
the asset for another use, the asset would not have an alternative use, regardless of the
characteristics of the completed asset. A contractual restriction is substantive if a
customer could enforce its rights to the promised asset if the entity sought to direct the
asset for another use. A practical limitation exists if an entity would incur a significant
economic loss to direct the asset for another use.104
The FASB TRG agenda paper included the following example:
Example 28.63: No alternative use
An entity enters into a contract with a customer to build customised equipment. The customisation of the
equipment occurs when the manufacturing process is approximately 75% complete. That is, for
approximately the first 75% of the manufacturing process, the in-process asset could be redirected to fulfil
another customer’s equipment order (assuming no contractual restrictions). However, the equipment cannot
be sold in its completed state to another customer without incurring a significant economic loss. The design
specifications of the equipment are unique to the customer and the entity would only be able to sell the
completed equipment at a significant economic loss.
The entity would evaluate, at contract inception, whether there is any contractual restriction or practical
limitation on its ability to readily direct the asset (in its completed state) for another use. Because the entity
cannot sell the completed equipment to another customer without incurring a significant economic loss, the
entity has a practical limitation on its ability to direct the equipment in its completed state and, therefore, the
asset does not have an alternative use. However, before concluding that revenue should be recognised over
time, an entity must evaluate whether it has an enforceable right to payment.
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8.1.4.D
Determining whether an entity has an enforceable right to payment
In November 2016, members of the FASB TRG were asked to consider how an entity
should determine whether it has an enforceable right to payment.105 The FASB TRG
members generally agreed that entities need to evaluate the contractual provisions to
determine whether the right to payment compensates the entity for performance
completed to date. For example, a contract may not explicitly provide an entity with an
enforceable right to payment for anything other than finished goods. However, if the
termination provisions in the contract allow for a notice period (e.g. 60 days) that would
provide sufficient time for an entity to move all work in progress to the finished goods
stage, it is likely that an entity would conclude that the contract provides for an
enforceable right to payment for performance completed to date. In addition, an entity
should consider any legislation or legal precedent that could supplement or override
any contractual terms.
The FASB TRG also discussed the linkage amongst right to payment, measure of
progress and the timing of the customisation of a good. For example, the FASB TRG
noted an entity may not always have an enforceable right to payment at contract
inception, such as when an entity is producing standard goods (i.e. inventory) that may
be customised for a customer towards the end of the production process. The FASB
TRG members generally agreed that an entity would need to consider whether it has an
enforceable right to payment related to its performance completed to date. If the entity’s
performance obligation is to customise its standard goods for a customer, FASB TRG
members generally agreed that an entity would evaluate whether it has an enforceable
right to payment at the point that the entity begins to satisfy the performance obligation
to customise the goods for the customer. That is, because the right to payment is for
performance completed to date, an entit
y’s performance should coincide with how it
defines the nature of its performance obligation and its measure of progress toward
satisfaction of that performance obligation.106
8.1.4.E
Enforceable right to payment: does an entity need a present
unconditional right to payment?
In order to have an enforceable right to payment for performance completed to date, does
an entity need to have a present unconditional right to payment? In the Basis for
Conclusions, the IASB clarified that the contractual payment terms in a contract may not
always align with an entity’s enforceable rights to payment for performance completed to
date. As a result, an entity does not need to have a present unconditional right to payment.
Instead, it must have an enforceable right to demand and/or retain payment for
performance completed to date upon customer termination without cause. To illustrate
this point, the Board included an example of a consulting contract that requires an entity
to provide a report at the end of the project. In return, the entity earns a fixed amount,
which is due and payable to the entity when it delivers the report. Assume that the entity
is performing under the contract and that the contract (or the law) requires the customer
to compensate the entity for its performance completed to date. In that situation, the
entity would have an enforceable right to payment for performance completed to date,
even though an unconditional right to the fixed amount only exists at the time the report
is provided to the customer. This is because the entity has a right to demand and retain
payment for performance completed to date. [IFRS 15.BC145].
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8.1.4.F
Enforceable right to payment: non-refundable upfront payments that
represent the full transaction price
If the entity receives a non-refundable upfront payment that represents the full
transaction price, an entity has a right to payment for performance completed to date.
The Board explained in the Basis for Conclusions that such a payment would represent
an entity’s right to payment for performance completed to date provided that the
entity’s right to retain and not refund the payment is enforceable upon termination by