services and recognised as the costs for those goods or services are incurred.
IFRS 15 does not dictate which approach an entity should use in these situations.
However, it is clear that an entity cannot use an input method based on costs incurred
to measure progress when costs are disproportionate to the entity’s progress throughout
the life of the contract. Not using a percentage-of-completion method (in which costs
incurred are used to measure the stage of completion) in these situations may represent
a significant change for some entities.
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The standard includes the following example, illustrating how uninstalled materials are
considered in measuring progress towards complete satisfaction of a performance
obligation. [IFRS 15.IE95-IE100].
Example 28.65: Uninstalled materials
In November 20X2, an entity contracts with a customer to refurbish a 3-storey building and install new elevators
for total consideration of $5 million. The promised refurbishment service, including the installation of elevators,
is a single performance obligation satisfied over time. Total expected costs are $4 million, including $1.5 million
for the elevators. The entity determines that it acts as a principal in accordance with paragraphs B34-B38 of
IFRS 15, because it obtains control of the elevators before they are transferred to the customer.
A summary of the transaction price and expected costs is as follows:
$
Transaction price
5,000,000
Expected costs
Elevators
1,500,000
Other
costs
2,500,000
Total expected costs
4,000,000
The entity uses an input method based on costs incurred to measure its progress towards complete satisfaction
of the performance obligation. The entity assesses whether the costs incurred to procure the elevators are
proportionate to the entity’s progress in satisfying the performance obligation, in accordance with
paragraph B19 of IFRS 15. The customer obtains control of the elevators when they are delivered to the site
in December 20X2, although the elevators will not be installed until June 20X3. The costs to procure the
elevators ($1.5 million) are significant relative to the total expected costs to completely satisfy the
performance obligation ($4 million). The entity is not involved in designing or manufacturing the elevators.
The entity concludes that including the costs to procure the elevators in the measure of progress would
overstate the extent of the entity’s performance. Consequently, in accordance with paragraph B19 of IFRS 15,
the entity adjusts its measure of progress to exclude the costs to procure the elevators from the measure of
costs incurred and from the transaction price. The entity recognises revenue for the transfer of the elevators
in an amount equal to the costs to procure the elevators (i.e. at a zero margin).
As at 31 December 20X2 the entity observes that:
(a) other costs incurred (excluding elevators) are $500,000; and
(b) performance is 20 per cent complete (i.e. $500,000 ÷ $2,500,000).
Consequently, at 31 December 20X2, the entity recognises the following:
$
Revenue 2,200,000
(a)
Cost of goods sold
2,000,000
(b)
Profit 200,000
(a) Revenue recognised is calculated as (20 per cent × $3,500,000) + $1,500,000. ($3,500,000 is $5,000,000 transaction
price – $1,500,000 costs of elevators).
(b) Cost of goods sold is $500,000 of costs incurred + $1,500,000 costs of elevators.
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8.2.3
Examples of measures of progress
The following example illustrates some possible considerations when determining an
appropriate measure of progress.
Example 28.66: Choosing the measure of progress
A ship-building entity enters into a contract to build 15 vessels for a customer over a three-year period.
The contract includes both design and production services. The entity has not built a vessel of this type in
the past. In addition, the entity expects that the first vessels may take longer to produce than the last vessels
because, as the entity gains experience building the vessels, it expects to be able to construct the vessels
more efficiently.
Assume that the entity has determined that the design and production services represent a single
performance obligation. In this situation, it is likely that the entity would not choose a ‘units-of-delivery’
method as a measure of progress because that method would not accurately capture the level of
performance. That is, such a method would not reflect the entity’s efforts during the design phase of the
contract because no revenue would be recognised until a vessel was shipped. In such situations, an entity
would likely determine that an input method is more appropriate, such as a percentage-of-completion
method based on costs incurred.
The standard also includes the following example on selecting an appropriate measure of progress towards
satisfaction of a performance obligation. [IFRS 15.IE92-IE94].
Example 28.67: Measuring progress when making goods or services available
An entity, an owner and manager of health clubs, enters into a contract with a customer for one year of access to
any of its health clubs. The customer has unlimited use of the health clubs and promises to pay £100 per month.
The entity determines that its promise to the customer is to provide a service of making the health clubs
available for the customer to use as and when the customer wishes. This is because the extent to which the
customer uses the health clubs does not affect the amount of the remaining goods and services to which the
customer is entitled. The entity concludes that the customer simultaneously receives and consumes the
benefits of the entity’s performance as it performs by making the health clubs available. Consequently, the
entity’s performance obligation is satisfied over time in accordance with paragraph 35(a) of IFRS 15.
The entity also determines that the customer benefits from the entity’s service of making the health clubs
available evenly throughout the year. (That is, the customer benefits from having the health clubs available,
regardless of whether the customer uses it or not.) Consequently, the entity concludes that the best measure
of progress towards complete satisfaction of the performance obligation over time is a time-based measure
and it recognises revenue on a straight-line basis throughout the year at CU100 per month.
8.2.4
Implementation questions on measuring progress over time
8.2.4.A
Measuring progress toward satisfaction of a stand-ready obligation that
is satisfied over time
At the January 2015 TRG meeting, the TRG members discussed questions raised
regarding how an entity would measure progress for a stand-ready obligation that is a
performance obligation satisfied over time.
The TRG members generally agreed that an entity should not default to a straight-
line revenue attribution model. However, they also generally agreed that if an entity
expects the customer to receive and consume the benefits of its promise
throughout the contract period, a time-based measure of progress (e.g. straight-
line) wo
uld be appropriate. The TRG agenda paper noted that this is generally the
case for unspecified upgrade rights, help-desk support contracts and cable or
satellite television contracts. The TRG members generally agreed that rateable
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recognition may not be appropriate if the benefits are not spread evenly over the
contract period (e.g. an annual snow removal contract that provides most benefits
in winter).113
8.2.4.B
Selecting a measure of progress when there is more than one promised
good or service within a performance obligation
In July 2015, the TRG members were asked to consider whether an entity can use more
than one measure of progress in order to depict an entity’s performance in transferring
a performance obligation comprised of two or more goods and/or services that is
satisfied over time. Note that, under Step 2 of the new model, a single performance
obligation may contain multiple non-distinct goods or services and/or distinct goods or
services that were required to be combined with non-distinct goods or services in order
to identify a distinct bundle. This bundled performance obligation is referred to as a
‘combined performance obligation’ for the purpose of this discussion.
The TRG members agreed that when an entity has determined that a combined
performance obligation is satisfied over time, the entity has to select a single measure
of progress that faithfully depicts the entity’s performance in transferring the goods or
services. For example, using different measures of progress for different non-distinct
goods or services in the combined performance obligation would be inappropriate
because doing so ignores the unit of account that has been identified under the standard
(i.e. the single combined performance obligation). Furthermore, it would also be
inappropriate because the entity would recognise revenue in a way that overrides the
separation and allocation requirements in the standard. [IFRS 15.BC161].
The TRG agenda paper noted that a single method of measuring progress should not be
broadly interpreted to mean an entity may apply multiple measures of progress as long
as all measures used are either output or input measures.114 The TRG members also
acknowledged that previously there was diversity in practice and selecting a single
measure of progress may represent a change for entities that used a multiple attribution
model in the past when deliverables could not be separated into units of account.
8.2.4.C
Determining the appropriate single measure of progress for a combined
performance obligation that is satisfied over time
At the July 2015 TRG meeting, the TRG members discussed how an entity would
determine the appropriate single measure of progress for a combined performance
obligation that is satisfied over time.
The TRG members acknowledged that it may be difficult to appropriately determine a
single measure of progress when the entity transfers goods or services that make up the
combined performance obligation over different points of time and/or the entity would
otherwise use a different measure of progress (e.g. a time-based method versus a labour-
based input method) if each promise was a separate performance obligation. Such a
determination requires significant judgement, but the TRG members generally agreed
that the measure of progress selected is not meant to be a ‘free choice’. Entities need to
consider the nature of the overall promise for the combined performance obligation in
determining the measure of progress to use. For example, entities should not default to
a ‘final deliverable’ methodology such that all revenue would be recognised over the
2200 Chapter 28
performance period of the last promised good or service. Rather, an entity is required
to select the single measure of progress that most faithfully depicts the entity’s
performance in satisfying its combined performance obligation.115
Some of the TRG members observed that an entity would need to consider the reasons
why goods or services were bundled into a combined performance obligation in order to
determine the appropriate pattern of revenue recognition. For example, if a good or
service was combined with other goods or services because it was not capable of being
distinct, that may indicate that it does not provide value or use to the customer on its own.
As such, the entity would not contemplate the transfer of that good or service when
determining the pattern of revenue recognition for the combined performance obligation.
The TRG members also generally agreed that, if an appropriately selected single
measure of progress does not faithfully depict the economics of the arrangement, the
entity should challenge whether the performance obligation was correctly combined
(i.e. there may be more than one performance obligation).
8.2.4.D
Can control of a good or service underlying a performance obligation
satisfied over time be transferred at discrete points in time?
The FASB TRG members generally agreed that, if a performance obligation meets the
criteria for revenue to be recognised over time (rather than at a point in time), control
of the underlying good or service is not transferred at discrete points in time. Because
control transfers as an entity performs, an entity’s performance (as reflected using an
appropriate measure of progress) should not result in the creation of a material asset in
the entity’s accounts (e.g. work in progress).
Stakeholders had queried whether control of a good or service underlying a
performance obligation that is satisfied over time can be transferred at discrete points
in time because the standard highlights several output methods, including ‘milestones
reached’, as potentially acceptable methods for measuring progress towards satisfaction
of an over-time performance obligation. The FASB TRG members generally agreed that
an entity could use an output method only if that measure of progress correlates to the
entity’s performance to date.116
At the May 2016 IASB meeting, the IASB staff indicated support for the conclusions
reached in the TRG agenda paper on this issue, noting that it provides some clarity about
when to use milestones reached as a measure of progress. Furthermore, the members
of the IASB who observed the FASB TRG meeting indicated that the FASB TRG
discussion on the topic was helpful.
8.2.4.E
Use of the ‘right to invoice’ practical expedient for a contract that
includes rates that change over the contractual term
At the July 2015 TRG meeting, the TRG members were asked to consider whether the
‘right to invoice’ practical expedient could apply to a contract that includes rates that
change over the contractual term.
The TRG members generally agreed that determining whether an entity can apply the
‘right to invoice’ practical expedient requires judgement. They also generally agreed
that it is possible for entities to meet the requirements for the practical expedient in
contracts with changing rates, provided that the changes in rates correspond directly to
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changes in value to the customer. That is, a cont
ract does not need to have a fixed price
per unit for the duration of a contract in order to qualify for the practical expedient.
Examples of contracts that might qualify include an IT outsourcing arrangement with
rates that decrease over the contract term as the level of effort to the customer
decreases or a multi-year electricity contract that contemplates the forward market
price of electricity. However, the SEC observer also noted that entities need to have
strong evidence that variable prices are representative of value to the customer in order
to recognise variable amounts of revenue for similar goods or services.117
See 11.4.1.D below for a discussion on whether an entity can still use the practical
expedient (under which an entity can decide not to disclose the amount of transaction
price allocated to remaining performance obligation) if it determines that it has not met
the criteria to use the ‘right to invoice’ practical expedient (e.g. because there is a
substantive contractual minimum payment or a volume discount).
8.2.4.F Recognising
revenue when fulfilment costs are incurred prior to the
contract establishment date for a specifically anticipated contract
An entity cannot begin to recognise revenue on a contract until it meets all five criteria
to be considered a contract under IFRS 15 (as discussed at 4.1 above), regardless of
whether it has received any consideration or has begun performing under the terms of
the arrangement.
At the March 2015 TRG meeting, the TRG members were asked to consider how an
entity would recognise revenue for at the date a contract exists if an entity begins
activities on a specifically anticipated contract either:
• before it agrees to the contract with the customer; or
• before the arrangement meets the criteria to be considered a contract under
the standard.118
The TRG members generally agreed that if the goods or services that ultimately will be
transferred meet the criteria to be recognised over time, revenue would be recognised
on a cumulative catch-up basis at the ‘contract establishment date’, reflecting the
performance obligation(s) that are partially or fully satisfied at that time. The TRG
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 437
