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performance has produced work in progress or finished goods controlled by the
customer that are not included in the measurement of the output. [IFRS 15.B15].
As a practical expedient, if an entity has a right to consideration from a customer
in an amount that corresponds directly with the value to the customer of the
entity’s performance completed to date (e.g. a service contract in which an entity
bills a fixed amount for each hour of service provided), the entity may recognise
revenue in the amount to which the entity has a right to invoice (‘right to invoice’
practical expedient, see 8.2.4.E and 11.4.1.D below for further discussion).
[IFRS 15.B16].
The disadvantages of output methods are that the outputs used to measure
progress may not be directly observable and the information required to apply
them may not be available to an entity without undue cost. Therefore, an input
method may be necessary. [IFRS 15.B17].
• Input methods
Input methods recognise revenue on the basis of the entity’s efforts or inputs to
the satisfaction of a performance obligation (e.g. resources consumed, labour hours
expended, costs incurred, time elapsed or machine hours used) relative to the total
expected inputs to the satisfaction of that performance obligation. If the entity’s
efforts or inputs are expended evenly throughout the performance period, it may
be appropriate for the entity to recognise revenue on a straight-line basis.
[IFRS 15.B18].
In determining the best method for measuring progress that faithfully depicts an entity’s
performance, an entity needs to consider both the nature of the promised goods or
services and the nature of the entity’s performance. [IFRS 15.41]. In other words, an
entity’s selection of a method to measure its performance needs to be consistent with
the nature of its promise to the customer and what the entity has agreed to transfer to
the customer. To illustrate this concept, the Basis for Conclusions cites, as an example,
a contract for health club services. [IFRS 15.BC160]. Regardless of when, or how frequently,
the customer uses the health club, the entity’s obligation to stand ready for the
contractual period does not change. Furthermore, the customer is required to pay the
fee regardless of whether the customer uses the health club. As a result, the entity would
need to select a measure of progress based on its service of standing ready to make the
health club available. Example 28.67 at 8.2.3 below illustrates how a health club might
select this measure of progress.
8.2.1 Output
methods
While there is no preferable measure of progress, the IASB stated in the Basis for
Conclusions that, conceptually, an output measure is the most faithful depiction of an
entity’s performance. This is because it directly measures the value of the goods or
services transferred to the customer. [IFRS 15.BC160]. However, the Board discussed two
output methods that may not be appropriate in many instances if the entity’s
performance obligation is satisfied over time: units of delivery and units of production.
[IFRS 15.BC165].
Units-of-delivery or units-of-production methods may not result in the best depiction of
an entity’s performance over time if there is material work in progress at the end of the
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reporting period. In these cases, the IASB observed that using a units-of-delivery or units-
of-production method would distort the entity’s performance because it would not
recognise revenue for the customer-controlled assets that are created before delivery or
before construction is complete. This is because, when an entity determines control
transfers to the customer over time, it has concluded that the customer controls any
resulting asset as it is created. Therefore, the entity must recognise revenue related to
those goods or services for which control has transferred. The IASB also stated, in the
Basis for Conclusions, that a units-of-delivery or units-of-production method may not be
appropriate if the contract provides both design and production services because each
item produced ‘may not transfer an equal amount of value to the customer’. [IFRS 15.BC166].
That is, it is likely that the items produced earlier have a higher value than those that are
produced later. It is important to note that ‘value to the customer’ in paragraph B15 of
IFRS 15 refers to an objective method of measuring the entity’s performance in the
contract. This is not intended to be assessed by reference to the market prices, stand-
alone selling prices or the value a customer perceives to be embodied in the goods or
services. [IFRS 15.BC163]. The TRG agenda paper noted that this concept of value is different
from the concept of value an entity uses to determine whether it can use the ‘right to
invoice’ practical expedient, as discussed below. When an entity determines whether
items individually transfer an equal amount of value to the customer (i.e. when applying
paragraph B15 of IFRS 15), the evaluation related to how much, or what proportion, of the
goods or services (i.e. quantities) have been delivered (but not the price). For example, for
the purposes of applying paragraph B15 of IFRS 15, an entity might consider the amount
of goods or services transferred to date in proportion to the total expected goods or
services to be transferred when measuring progress. However, if this measure of progress
results in material work in progress at the end of the reporting period, it would not be
appropriate, as discussed above.109 See the discussion at 8.2.1.A below regarding the
evaluation of ‘value to the customer’ in the context of evaluating the ‘right to invoice’
practical expedient in paragraph B16 of IFRS 15.
8.2.1.A
Practical expedient for measuring progress towards satisfaction of a
performance obligation
The Board provided a practical expedient in paragraph B16 of IFRS 15 for an entity that
is using an output method to measure progress towards completion of a performance
obligation that is satisfied over time. The practical expedient only applies if an entity
can demonstrate that the invoiced amount corresponds directly with the value to the
customer of the entity’s performance completed to date. [IFRS 15.B16]. In that situation,
the practical expedient allows an entity to recognise revenue in the amount for which
it has the right to invoice (i.e. the ‘right to invoice’ practical expedient). An entity may
be able to use this practical expedient for a service contract in which an entity bills a
fixed amount for each hour of service provided.
A TRG agenda paper noted that paragraph B16 of IFRS 15 is intended as an expedient to
some aspects of Step 3, Step 4 and Step 5 in the standard. Because this practical expedient
allows an entity to recognise revenue on the basis of invoicing, revenue is recognised by
multiplying the price (assigned to the goods or services delivered) by the measure of
progress (i.e. the quantities or units transferred). Therefore, an entity effectively bypasses
the steps in the model for determining the transaction price, allocating that transaction
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> price to the performance obligations and determining when to recognise revenue.
However, it does not permit an entity to bypass the requirements for identifying the
performance obligations in the contract and evaluating whether the performance
obligation are satisfied over time, which is a requirement to use this expedient.110
To apply the practical expedient, an entity must also be able to assert that the right to
consideration from a customer corresponds directly with the value to the customer of
the entity’s performance to date. When determining whether the amount that has been
invoiced to the customer corresponds directly with the value to the customer of an
entity’s performance completed to date, the entity could evaluate the amount that has
been invoiced in comparison to market prices, stand-alone selling prices or another
reasonable measure of value to the customer. See 8.2.4.E below for the TRG discussion
on evaluating value to the customer in contracts with changing rates.
Furthermore, the TRG members also noted in their discussion of the TRG agenda paper
that an entity would have to evaluate all significant upfront payments or retrospective
adjustments (e.g. accumulating rebates) in order to determine whether the amount the
entity has a right to invoice for each good or service corresponds directly to the value to
the customer of the entity’s performance completed to date. That is, if an upfront payment
or retrospective adjustment shifts payment for value to the customer to the front or back-
end of a contract, it may be difficult for an entity to conclude that the amount invoiced
corresponds directly with the value provided to the customer for goods or services.111
The TRG agenda paper also stated that the presence of an agreed-upon customer payment
schedule does not mean that the amount an entity has the right to invoice corresponds
directly with the value to the customer of the entity’s performance completed to date. In
addition, the TRG agenda paper stated that the existence of specified contract minimums
(or volume discounts) would not always preclude the application of the practical
expedient, provided that these clauses are deemed non-substantive (e.g. the entity expects
to receive amounts in excess of the specified minimums).112
8.2.2 Input
methods
Input methods recognise revenue based on an entity’s efforts or inputs towards
satisfying a performance obligation relative to the total expected efforts or inputs to
satisfy the performance obligation. Examples of input methods mentioned in the
standard include costs incurred, time elapsed, resources consumed or labour hours
expended. An entity is required to select a single measure of progress for each
performance obligation that depicts the entity’s performance in transferring control of
the goods or services promised to a customer. If an entity’s efforts or inputs are used
evenly throughout the entity’s performance period, a time-based measure that results
in a straight line recognition of revenue may be appropriate. However, there may be a
disconnect between an entity’s inputs (e.g. cost of non-distinct goods included in a
single performance obligation satisfied over time) and the depiction of an entity’s
performance to date. The standard includes specific application guidance on
adjustments to the measure of progress that may be necessary in those situations.
See 8.2.2.A below for additional discussion.
Regardless of which method an entity selects, it excludes from its measure of progress
any goods or services for which control has not transferred to the customer.
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8.2.2.A
Adjustments to the measure of progress based on an input method
If an entity applies an input method that uses costs incurred to measure its progress
towards completion (e.g. cost to cost), the cost incurred may not always be
proportionate to the entity’s progress in satisfying the performance obligation. To
address this shortcoming of input methods, the standard notes that a shortcoming of
input methods is that there may not be a direct relationship between an entity’s inputs
and the transfer of control of goods or services to a customer. Therefore, an entity is
required to exclude the effects of any inputs that do not depict the entity’s performance
(in transferring control of goods or services to the customer) from an input method. For
instance, when using a cost-based input method, the standard suggests an adjustment to
the measure of progress may be required in the following circumstances: [IFRS 15.B19]
(a) When a cost incurred does not contribute to an entity’s progress in satisfying the
performance obligation.
As an example, the standard states that an entity would not recognise revenue on
the basis of costs incurred that are attributable to significant inefficiencies in the
entity’s performance that were not reflected in the price of the contract (e.g. the
costs of unexpected amounts of wasted materials, labour or other resources that
were incurred to satisfy the performance obligation).
(b) When a cost incurred is not proportionate to the entity’s progress in satisfying the
performance obligation.
In those circumstances, the standard states that the best depiction of the entity’s
performance may be to adjust the input method to recognise revenue only to the
extent of that cost incurred. For example, a faithful depiction of an entity’s
performance might be to recognise revenue at an amount equal to the cost of a
good used to satisfy a performance obligation if the entity expects at contract
inception that all of the following conditions would be met:
(i) the good is not distinct;
(ii) the customer is expected to obtain control of the good significantly before
receiving services related to the good;
(iii) the cost of the transferred good is significant relative to the total expected
costs to completely satisfy the performance obligation; and
(iv) the entity procures the good from a third party and is not significantly
involved in designing and manufacturing the good (but the entity is acting as
a principal, see 5.4 above).
In a combined performance obligation comprised of non-distinct goods or services, the
customer may obtain control of some of the goods before the entity provides the services
related to those goods. This could be the case when goods are delivered to a customer site,
but the entity has not yet integrated the goods into the overall project (e.g. the materials are
‘uninstalled’). The Board concluded that, if an entity were using a percentage-of-completion
method based on costs incurred to measure its progress (i.e. cost-to-cost), the measure of
progress may be inappropriately affected by the delivery of these goods and that a pure
application of such a measure of progress would result in overstated revenue. [IFRS 15.BC171].
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Paragraph B19 of IFRS 15 indicates that, in such circumstances, (e.g. when control of the
individual goods has transferred to the customer, but the integration service has not yet
occurred), the best depiction of the entity’s performance may be to recognise revenue
at an amount equal to the cost of the goods used to satis
fy the performance obligation
(i.e. a zero margin). This is because the costs incurred are not proportionate to an
entity’s progress in satisfying the performance obligation. It is also important to note
that determining when control of the individual goods (that are part of a performance
obligation) have transferred to the customer requires judgement. [IFRS 15.B19].
The Board noted that the adjustment to the cost-to-cost measure of progress for
uninstalled materials is generally intended to apply to a subset of construction-type
goods that have a significant cost relative to the contract and for which the entity is
effectively providing a simple procurement service to the customer. [IFRS 15.BC172]. By
applying the adjustment to recognise revenue at an amount equal to the cost of
uninstalled materials, an entity is recognising a margin similar to the one the entity
would have recognised if the customer had supplied the materials. The IASB clarified
that the outcome of recognising no margin for uninstalled materials is necessary to
adjust the cost-to-cost calculation to faithfully depict an entity’s performance.
[IFRS 15.BC174].
In addition, situations may arise in which not all of the costs incurred contribute to the
entity’s progress in completing the performance obligation. Paragraph B19(a) of IFRS 15
requires that, under an input method, an entity exclude these types of costs (e.g. costs
related to significant inefficiencies, wasted materials, required rework) from the
measure of progress, unless such costs were reflected in the price of the contract.
[IFRS 15.B19(a)].
The requirements for uninstalled materials may be a significant change from previous
practice for some entities. IAS 11 contained a requirement that when the stage of
completion was determined by reference to the contract costs incurred to date, only
those contract costs that reflected work performed were included. [IAS 11.31]. Hence,
costs related to future activities, such as costs of materials (that did not have a high
specificity to the contact) delivered to a contract site or set aside for use in a contract,
but not yet installed, would not form part of the assessment of costs incurred to date.
When installed, these would be included in the costs incurred to date. Under IFRS 15,
any margin related to the uninstalled materials would be shifted to the other goods or