agenda paper noted that the cumulative catch-up method is considered to be consistent
with the overall principle of the standard that revenue is recognised when (or as) an
entity transfers control of goods or services to a customer.119
See 10.3.2.B below for the TRG members’ discussion regarding contract fulfilment costs
incurred prior to the contract establishment date.
8.3
Control transferred at a point in time
For performance obligations in which control is not transferred over time, control is
transferred as at a point in time. [IFRS 15.38]. In many situations, the determination of
when that point in time occurs is relatively straightforward. However, in other
circumstances, this determination is more complex.
To help entities determine the point in time when a customer obtains control of a
particular good or service, the standard requires an entity to consider the general
requirements for control in paragraphs 31-34 of IFRS 15 (see 8 above). In addition, an
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entity is required to consider indicators of the transfer of control, which include, but are
not limited to, the following. [IFRS 15.38].
(a) The entity has a present right to payment for the asset – if a customer is presently
obliged to pay for an asset, then that may indicate that the customer has obtained
the ability to direct the use of, and obtain substantially all of the remaining benefits
from, the asset in exchange.
(b) The customer has legal title to the asset – legal title may indicate which party to a
contract has the ability to direct the use of, and obtain substantially all of the
remaining benefits from, an asset or to restrict the access of other entities to those
benefits. Therefore, the transfer of legal title of an asset may indicate that the
customer has obtained control of the asset. If an entity retains legal title solely as
protection against the customer’s failure to pay, those rights of the entity would
not preclude the customer from obtaining control of an asset.
(c) The entity has transferred physical possession of the asset – the customer’s
physical possession of an asset may indicate that the customer has the ability to
direct the use of, and obtain substantially all of the remaining benefits from, the
asset or to restrict the access of other entities to those benefits. However, physical
possession may not coincide with control of an asset. For example, in some
repurchase agreements (see 8.4 below) and in some consignment arrangements, a
customer or consignee may have physical possession of an asset that the entity
controls (see 5.5 above and 8.5 below). Conversely, in some bill-and-hold
arrangements (see 8.6 below), the entity may have physical possession of an asset
that the customer controls.
(d) The customer has the significant risks and rewards of ownership of the asset – the
transfer of the significant risks and rewards of ownership of an asset to the
customer may indicate that the customer has obtained the ability to direct the use
of, and obtain substantially all of the remaining benefits from, the asset. However,
when evaluating the risks and rewards of ownership of a promised asset, an entity
is required to exclude any risks that give rise to a separate performance obligation
in addition to the performance obligation to transfer the asset. For example, an
entity may have transferred control of an asset to a customer but not yet satisfied
an additional performance obligation to provide maintenance services related to
the transferred asset.
(e) The customer has accepted the asset – the customer’s acceptance of an asset may
indicate that it has obtained the ability to direct the use of, and obtain substantially
all of the remaining benefits from, the asset (see 8.3.2 below).
None of the indicators above are meant to individually determine whether the customer
has gained control of the good or service. For example, while shipping terms may
provide information about when legal title to a good transfers to the customer, they are
not determinative when evaluating the point in time at which the customer obtains
control of the promised asset. See 8.3.1 below for further discussion on shipping terms.
An entity must consider all relevant facts and circumstances to determine whether
control has transferred. The IASB also made it clear that the indicators are not meant to
be a checklist. Furthermore, not all of them must be present for an entity to determine
that the customer has gained control. Rather, the indicators are factors that are often
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present when a customer has obtained control of an asset and the list is meant to help
entities apply the principle of control. [IFRS 15.BC155].
Paragraph 38 of IFRS 15 also states that indicators of control transfer are not limited to
those listed above. For example, channel stuffing is a practice that entities sometimes
use to increase sales by inducing distributors or resellers to buy substantially more goods
than can be promptly resold. To induce the distributors to make such purchases, an
entity may offer deep discounts that it would have to evaluate as variable consideration
in estimating the transaction price (see 6.2 above). Channel stuffing also may be
accompanied by side agreements with the distributors that provide a right of return for
unsold goods that is in excess of the normal sales return privileges offered by the entity.
Significant increases in, or excess levels of, inventory in a distribution channel due to
channel stuffing may affect or preclude the ability to conclude that control of such goods
has transferred. Entities need to carefully consider the expanded rights of returns
offered to customers in connection with channel stuffing in order to determine whether
they prevent the entity from recognising revenue at the time of the sales transaction.
If an entity uses channel stuffing practices, it should consider whether disclosure in its
financial statements is required when it expects these practices to materially affect future
operating results. For example, if an entity sold excess levels into a certain distribution
channel at, or near, the end of a reporting period, it is likely that those sales volumes would
not be sustainable in future periods. That is, sales into that channel may, in fact, slowdown
in future periods as the excess inventory takes longer to entirely sell through the channel.
In such a case, the entity should consider whether disclosure of the effect of the channel
stuffing practice on its current and future earnings is required, if material.
We discuss the indicators in paragraph 38 of IFRS 15 that an entity considers when
determining when it transfers control of the promised good or service to the customer
in more detail below.
• Present right to payment for the asset
As noted in the Basis for Conclusions, the IASB considered, but rejected specifying
a right to payment as an overarching criterion for determining when revenue would
be recognised. Therefore, while the date at which the entity has a right to payment
for the asset may be an indicator of the date the customer obtained control of the
asset, it does not always indicate that the customer has obtained cont
rol of the asset.
[IFRS 15.BC148]. For example, in some contracts, a customer is required to make a non-
refundable upfront payment, but receives no goods or services in return at that time.
• Legal title and physical possession
The term ‘title’ is often associated with a legal definition denoting the ownership
of an asset or legally recognised rights that preclude others’ claim to the asset.
Accordingly, the transfer of title often indicates that control of an asset has been
transferred. Determination of which party has title to an asset does not always
depend on which party has physical possession of the asset, but without
contractual terms to the contrary, title generally passes to the customer at the time
of the physical transfer. For example, in a retail store transaction, there is often no
clear documentation of the transfer of title. However, it is generally understood
that the title to a product is transferred at the time it is purchased by the customer.
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While the retail store transaction is relatively straightforward, determining when
title has transferred may be more complicated in other arrangements. Transactions
that involve the shipment of products may have varying shipping terms and may
involve third-party shipping agents. In such cases, a clear understanding of the
seller’s practices and the contractual terms is required in order to make an
assessment of when title transfers. As indicated in paragraph 38(b) of IFRS 15, legal
title and/or physical possession may be an indicator of which party to a contract
has the ability to direct the use of, and obtain substantially all of the remaining
benefits from, an asset or to restrict the access of other entities to those benefits.
See 8.3.1 below for further discussion on how shipping terms affect when an entity
has transferred control of a good to a customer.
• Risks and rewards of ownership
Although the Board included the risks and rewards of ownership as one factor to
consider when evaluating whether control of an asset has transferred, it emphasised,
in the Basis for Conclusions, that this factor does not change the principle of
determining the transfer of goods or services on the basis of control. [IFRS 15.BC154].
The concept of the risks and rewards of ownership is based on how the seller and
the customer share both the potential gain (the reward) and the potential loss (risk)
associated with owning an asset. Rewards of ownership include the following:
• rights to all appreciation in value of the asset;
• unrestricted usage of the asset;
• ability to modify the asset;
• ability to transfer or sell the asset; and
• ability to grant a security interest in the asset.
Conversely, the risks of ownership include the following:
• absorbing all of the declines in market value;
• incurring losses due to theft or damage of the asset; and
• incurring losses due to changes in the business environment
(e.g. obsolescence, excess inventory, effect of retail pricing environment).
However, as noted in paragraph 38(d) of IFRS 15, an entity does not consider risks
that give rise to a separate performance obligation when evaluating whether the
entity has the risks of ownership of an asset. For example, an entity does not consider
warranty services that represent a separate performance obligation when evaluating
whether it retains the risks of ownership of the asset sold to the customer.
• Customer acceptance
See the discussion of this indicator in 8.3.2 below.
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8.3.1
Effect of shipping terms when an entity has transferred control of a
good to a customer
Under the standard, an entity recognises revenue only when it satisfies an identified
performance obligation by transferring a promised good or service to a customer. While
shipping terms may provide information about when legal title to a good transfers to the
customer, they are not determinative when evaluating the point in time at which the
customer obtains control of the promised asset. Entities must consider all relevant facts
and circumstances to determine whether control has transferred.
For example, when the shipping terms are free on board (FOB), entities need to
carefully consider whether the customer or the entity has the ability to control the
goods during the shipment period. Furthermore, if the entity has the legal or
constructive obligation to replace goods that are lost or damaged in transit, it needs
to evaluate whether that obligation influences the customer’s ability to direct the use,
and obtain substantially all of the remaining benefits from the goods. A selling entity’s
historical practices also need to be considered when evaluating whether control of a
good has transferred to a customer because the entity’s practices may override the
contractual terms of the arrangement.
Contractually specified shipping terms may vary depending on factors such as the mode
of transport (e.g. by sea, inland waterway, road, air) and whether the goods are shipped
locally or internationally. A selling entity may utilise International Commerce Terms
(Incoterms) to clarify when delivery occurs. Incoterms are a series of pre-defined
commercial terms published by the International Chamber of Commerce (ICC) relating
to international commercial law. For example, the Incoterms ‘EXW’ or ‘Ex Works’
means that the selling entity ‘delivers’ when it places the goods at the disposal of the
customer, either at the seller’s premises or at another named location (e.g. factory,
warehouse). The selling entity is not required to load the goods on any collecting
vehicle, nor does it need to clear the goods for export (if applicable, see further
discussion on the Ex Works Incoterm at 8.6 below). The Incoterm FOB means ‘the seller
delivers the goods on board the vessel nominated by the buyer at the named port of
shipment or procures the goods already so delivered. The risk of loss of or damage to
the goods passes when the goods are on board the vessel, and the buyer bears all costs
from that moment onwards’.120
8.3.2 Customer
acceptance
When determining whether the customer has obtained control of the goods or services,
an entity must consider any customer acceptance clauses that require the customer to
approve the goods or services before it is obligated to pay for them. If a customer does
not accept the goods or services, the entity may not be entitled to consideration, may
be required to take remedial action or may be required to take back the delivered good.
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The standard states that a customer’s acceptance of an asset may indicate that the
customer has obtained control of the asset. Customer acceptance clauses allow a
customer to cancel a contract or require an entity to take remedial action if a good or
service does not meet agreed-upon specifications. As such, an entity needs to consider
such clauses when evaluating when a customer obtains control of a good or service.
[IFRS 15.B83].
If an entity can objectively determine that control of a good or service has been
transferred to the custom
er in accordance with the agreed-upon specifications in the
contract, then customer acceptance is a formality that would not affect the entity’s
determination of when the customer has obtained control of the good or service. The
standard gives the example of a clause that is based on meeting specified size and weight
characteristics. In that situation, an entity would be able to determine whether those
criteria have been met before receiving confirmation of the customer’s acceptance. The
entity’s experience with contracts for similar goods or services may provide evidence
that a good or service provided to the customer is in accordance with the agreed-upon
specifications in the contract. If revenue is recognised before customer acceptance, the
entity still needs to consider whether there are any remaining performance obligations
(e.g. installation of equipment) and evaluate whether to account for them separately.
[IFRS 15.B84].
Conversely, if an entity cannot objectively determine that the good or service
provided to the customer is in accordance with the agreed-upon specifications in
the contract, it would not be able to conclude that the customer has obtained
control until the entity receives the customer’s acceptance. In that circumstance,
the entity cannot determine that the customer has the ability to direct the use of,
and obtain substantially all of the remaining benefits from, the good or service.
[IFRS 15.B85].
If an entity delivers products to a customer for trial or evaluation purposes and the
customer is not committed to pay any consideration until the trial period lapses, the
standard clarifies that control of the product is not transferred to the customer until
either the customer accepts the product or the trial period lapses. [IFRS 15.B86].
Some acceptance provisions may be straightforward, giving a customer the ability to
accept or reject the transferred products based on objective criteria specified in the
contract (e.g. the goods function at a specified speed). Other acceptance clauses may be
subjective or may appear in parts of the contract that do not typically address
acceptance matters, such as warranty provisions or indemnification clauses.
Professional judgement may be required to determine the effect on revenue recognition
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 438
