the customer. This is because a full upfront payment would at least compensate an entity
for the work completed to date throughout the contract. [IFRS 15.BC146].
8.1.4.G
Determining whether an entity has an enforceable right to payment for a
contract priced at a loss
An entity may have an enforceable right to payment for performance completed to date
even though the contract is priced at a loss. However, the specific facts and
circumstances of the contract must be considered. As discussed above, the standard
states that, if a contract is terminated for reasons other than the entity’s failure to
perform as promised, the entity must be entitled to an amount that at least compensates
it for its performance to date. Furthermore, paragraph B9 of IFRS 15 states that ‘an
amount that would compensate an entity for performance completed to date would be
an amount that approximates the selling price of the goods or services transferred to
date (for example, recovery of the costs incurred by an entity in satisfying the
performance obligation plus a reasonable profit margin).’ Accordingly, stakeholders had
asked whether an entity could have an enforceable right to payment for performance
completed to date if the contract was priced at a loss.
We believe that the example in paragraph B9 of IFRS 15 of cost recovery plus a
reasonable profit margin does not preclude an entity from having an enforceable right
to payment even if the contract is priced at a loss. Rather, we believe an entity should
evaluate whether it has an enforceable right to receive an amount that approximates the
selling price of the goods or services for performance completed to date in the event
the customer terminates the contract.
Consider the following example from the American Institute of Certified Public
Accountants (AICPA) Audit and Accounting Guide on revenue recognition.107
Example 28.64: Determination of enforceable right to payment for a contract
priced at a loss
Customer X requests bids for the design of a highly customised system. The customer expects to award
subsequent contracts for systems over the next 10 years to the entity that wins the design contract.
Contractor A is aware of the competition and knows that in order to win the design contract it must bid the
contract at a loss. That is, Contractor A is willing to bid the design contract at a loss due to the significant
value in future expected orders.
Contractor A wins the contract with a value of €100 and estimated costs to complete of €130. Contractor A has
determined that the contract contains a single performance obligation and that its performance does not create
an asset with an alternative use. The contract is non-cancellable, however, the contract terms stipulate that if the
customer terminates the contract, Contractor A would be entitled to payment for work completed to date. The
payment amount would be equal to a proportional amount of the price of the contract based upon the performance
of work done to date. For example, if at the termination date Contractor A was 50% complete (i.e. incurred €65
of costs), it would be entitled to a €50 payment from Customer X (i.e. 50% of €100 contract value).
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In this example, we believe Contractor A has an enforceable right to payment for performance completed to
date. This is in accordance with paragraph 35(c) of IFRS 15 because Contractor A is entitled to an amount
that approximates the selling price of the good or service for performance completed to date in the event the
customer terminates the contract.
Refer to 10.2 below regarding accounting for anticipated losses on contracts.
8.1.4.H
Enforceable right to payment determination when not entitled to a
reasonable profit margin on standard inventory materials purchased, but
not yet used
An entity may have an enforceable right to payment for performance completed to date
even if it is not entitled to a reasonable profit margin on standard inventory materials
that were purchased but not yet used in completing the performance obligation.
Consider an example in which an entity agrees to construct a specialised asset for a
customer that has no alternative use to the entity. The construction of this asset requires
the use of standard inventory materials that could be used interchangeably on other
projects of the entity until they are integrated into the production of the customer’s
asset. The contract with the customer entitles the entity to reimbursement of costs
incurred plus a reasonable profit margin if the contract is terminated. However, the
contract specifically excludes reimbursement of standard inventory purchases before
they are integrated into the customer’s asset. As previously discussed, the standard
states that, at any time during the contract, an entity must be entitled to an amount that
compensates the entity for performance completed to date (as defined in paragraph B9
of IFRS 15) if the contract is terminated for reasons other than the entity’s failure to
perform. However, in this example, the standard inventory materials have not yet been
used in fulfilling the performance obligation so the entity does not need to have an
enforceable right to payment in relation to these materials. The entity could also
repurpose the materials for use in other contracts with customers.
The entity will still need to evaluate whether it has an enforceable right to payment for
performance completed to date once the standard inventory materials are used in
fulfilling the performance obligation.
8.1.4.I Considerations
when
assessing the over-time criteria for the sale of a real
estate unit
The IFRS Interpretations Committee received three requests regarding the assessment
of the over-time criteria in relation to contracts for the sale of a real estate unit. At its
March 2018 meeting, the IFRS Interpretations Committee concluded that the principles
and requirements in IFRS 15 provide an adequate basis for an entity to determine
whether to recognise revenue over time, or at a point in time, including whether it has
an enforceable right to payment for performance completed to date for a contract for
the sale of a real estate unit. Consequently, the IFRS Interpretations Committee decided
not to add these matters to its agenda.
After considering these requests, the IFRS Interpretations Committee decided that the
agenda decisions should discuss the requirements of IFRS 15, as well as how the
requirements apply to the fact patterns within the requests. The agenda decisions
included the following reminders:
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• an entity accounts for contracts within the scope of IFRS 15 only when all the
criteria in paragraph 9 of IFRS 15 are met (which includes the collectability
criterion);
• before considering the over-time criteria, an entity is required to apply
paragraphs 22 – 30 of IFRS 15 to identify whether each promise to transfer a good
or service to the customer is a performance obligation (see 5.2 above for further
discussion); and
• an entity assesses the over-time criteria in paragraph 35 of IFRS 15 at contract
inception. Paragraph 35 of IFRS 15 specifies tha
t an entity transfers control of a
good or service over time and, therefore, satisfies a performance obligation and
recognises revenue over time, if any of the three criteria is met. If an entity does
not satisfy a performance obligation over time, it satisfies the performance
obligation at a point in time.
The agenda decisions also noted the following in relation to the over-time criteria.108
Criterion (a)
According to paragraph 35(a) of IFRS 15, an entity recognises revenue over time if the
customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs. This criterion is not applicable in a contract for the
sale of a real estate unit that the entity constructs because the real estate unit created
by the entity’s performance is not consumed immediately.
Criterion (b)
Paragraph 35(b) of IFRS 15 specifies that an entity recognises revenue over time if the
customer controls the asset that an entity’s performance creates or enhances as the asset
is created or enhanced. Control refers to the ability to direct the use of, and obtain
substantially all of the remaining benefits from, the asset. The Board included this
criterion to ‘address situations in which an entity’s performance creates or enhances an
asset that a customer clearly controls as the asset is created or enhanced’. Therefore, all
relevant facts and circumstances need to be considered by an entity when assessing
whether there is evidence that the customer clearly controls the asset that is being
created or enhanced (e.g. the part-constructed real estate unit) as it is created or
enhanced. None of the facts and circumstances is determinative.
The IFRS Interpretations Committee observed that ‘in a contract for the sale of real
estate that the entity constructs, the asset created is the real estate itself. It is not, for
example, the right to obtain the real estate in the future. The right to sell or pledge a
right to obtain real estate in the future is not evidence of control of the real estate itself’.
That is, it is important to apply the requirements for control to the asset that the entity’s
performance creates or enhances.
Criterion (c)
The Board developed this third criterion because, in some cases, it may not be clear
whether the asset that is created or enhanced is controlled by the customer.
Paragraph 35(c) of IFRS 15 requires an entity to determine whether: (a) the asset created
by an entity’s performance does not have an alternative use to the entity; and (b) the
entity has an enforceable right to payment for performance completed to date.
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However, the underlying objective of this criterion is still to determine whether the
entity is transferring control of goods or services to the customer as it is creating the
asset for that customer. The agenda decisions reiterate that:
• the asset being created does not have an alternative use to the entity if the entity
is restricted contractually from readily directing the asset for another use during
the asset’s creation or if it is limited practically from readily directing the asset in
the completed state for another use; [IFRS 15.36] and
• the entity has an enforceable right to payment if it is entitled to an amount that at
least compensates it for performance completed to date were the contract to be
terminated by the customer for reasons other than the entity’s failure to perform
as promised. [IFRS 15.37]. The entity must be entitled to this amount at all times
throughout the duration of the contract and this amount should at least
approximate the selling price of the goods or services transferred to date. That is,
it is not meant to refer to compensation for only the entity’s potential loss of profit
were the contract to be terminated. The IFRS Interpretations Committee observed
that ‘it is the payment the entity is entitled to receive under the contract with the
customer relating to performance under that contract that is relevant in
determining whether the entity has an enforceable right to payment for
performance completed to date’.
In determining whether it has an enforceable right to payment, an entity considers
the contractual terms as well as any legislation or legal precedent that could
supplement or override those contractual terms. While an entity does not need to
undertake an exhaustive search for evidence, it is not appropriate for an entity to
ignore evidence of relevant legal precedent that is available to it or to anticipate
evidence that may become available in the future. The IFRS Interpretations
Committee also observed that ‘the assessment ... is focused on the existence of the
right and its enforceability. The likelihood that the entity would exercise the right
is not relevant to this assessment. Similarly, if a customer has the right to terminate
the contract, the likelihood that the customer would terminate the contract is not
relevant to this assessment’.
8.2
Measuring progress over time
When an entity has determined that a performance obligation is satisfied over time, the
standard requires the entity to select a single revenue recognition method for the
relevant performance obligation. The objective is to faithfully depict an entity’s
performance in transferring control of goods or services promised to a customer (i.e. the
satisfaction of an entity’s performance obligation). [IFRS 15.39].
The standard requires the entity to select a single revenue recognition method to
measure progress. The selected method must be applied consistently to similar
performance obligations and in similar circumstances. At the end of each reporting
period, an entity remeasures its progress towards complete satisfaction of a
performance obligation satisfied over time. [IFRS 15.40]. Regardless of which method an
entity selects, it excludes from its measure of progress any goods or services for which
control has not transferred. [IFRS 15.42].
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As circumstances change over time, an entity updates its measure of progress to reflect
any changes in the outcome of the performance obligation. Such changes to an entity’s
measure of progress are accounted for as a change in accounting estimate in accordance
with IAS 8. [IFRS 15.43].
While the standard requires an entity to update its estimates related to the measure of
progress selected, it does not permit a change in method. A performance obligation is
accounted for using the method the entity selects (i.e. either the specific input or output
method it has chosen) from inception until the performance obligation has been fully
satisfied. It would not be appropriate for an entity to start recognising revenue based on
an input measure and later switch to an output measure (or to switch from one input
method to a different input method). Furthermore, the standard requires that the
selected method be applied to similar contracts in similar circumstances. It also requires
that a single method of measuring progress be used for each performance obligation.
[IFRS 15.40]. The Board noted that applying more than one method to measure
performance would effectively overrid
e the guidance on identifying performance
obligations. [IFRS 15.BC161].
If an entity does not have a reasonable basis to measure its progress, revenue cannot be
recognised until progress can be reasonably measured. [IFRS 15.44]. However, if an entity
can determine that a loss will not be incurred, the standard requires the entity to
recognise revenue up to the amount of the costs incurred. [IFRS 15.45]. The IASB
explained that an entity would need to stop using this method once it is able to
reasonably measure its progress towards satisfaction of the performance obligation.
[IFRS 15.BC180]. Finally, stakeholders had asked whether an entity’s inability to measure
progress would mean that costs incurred would also be deferred. The Board clarified
that costs cannot be deferred in these situations, unless they meet the criteria for
capitalisation under paragraph 95 of IFRS 15 (see 10.3.2 below). [IFRS 15.BC179].
The standard provides two methods for recognising revenue on contracts involving the
transfer of goods or services over time: input methods and output methods. [IFRS 15.41, B14].
The standard contains the following application guidance on these methods.
• Output methods
Output methods recognise revenue on the basis of direct measurements of the
value to the customer of the goods or services transferred to date relative to the
remaining goods or services promised under the contract. Output methods include
methods such as surveys of performance completed to date, appraisals of results
achieved, milestones reached, time elapsed and units produced or units delivered.
[IFRS 15.B15].
When an entity evaluates whether to apply an output method to measure its
progress, the standard requires that an entity consider whether the output selected
would faithfully depict the entity’s performance towards complete satisfaction of
the performance obligation. This would not be the case if the output selected
would fail to measure some of the goods or services for which control has
transferred to the customer. For example, output methods based on units produced
or units delivered would not faithfully depict an entity’s performance in satisfying
a performance obligation if, at the end of the reporting period, the entity’s
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 435
