(a) the reason for the bill-and-hold arrangement must be substantive (e.g. the
customer has requested the arrangement);
(b) the product must be identified separately as belonging to the customer;
(c) the product currently must be ready for physical transfer to the customer; and
(d) the entity cannot have the ability to use the product or to direct it to another customer.
If an entity recognises revenue for the sale of a product on a bill-and-hold basis, the
standard requires that it consider whether it has remaining performance obligations (e.g.
for custodial services) to which it is required to allocate a portion of the transaction
price. [IFRS 15.B82].
When evaluating whether revenue recognition is appropriate for a bill-and-hold
transaction, an entity must evaluate the application guidance in both paragraphs 38 of
IFRS 15 (to determine whether control has been transferred to the customer) and B81 of
IFRS 15 (to determine whether all four bill-and-hold criteria are met). The criteria that
must be met are:
• the reason for the bill-and-hold arrangement must be substantive (e.g. the customer
has requested the arrangement). A bill-and-hold transaction initiated by the selling
entity typically indicates that a bill-and-hold arrangement is not substantive. We would
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generally expect the customer to request such an arrangement and the selling entity
would need to evaluate the reasons for the request to determine whether the customer
has a substantive business purpose. Judgement is required when assessing this
criterion. For example, a customer with an established buying history that places an
order in excess of its normal volume and requests that the entity retains the product
needs to be evaluated carefully because the request may not appear to have a
substantive business purpose;
• the product must be identified separately as belonging to the customer. Even if the
entity’s inventory is homogenous, the customer’s product must be segregated from
the entity’s ongoing fulfilment operations;
• the product currently must be ready for physical transfer to the customer. In any
revenue transaction recognised at a point in time, revenue is recognised when an
entity has satisfied its performance obligation to transfer control of the product to
the customer. If an entity has remaining costs or effort to develop, manufacture or
refine the product, the entity may not have satisfied its performance obligation.
This criterion does not include the actual costs to deliver a product, which would
be normal and customary in most revenue transactions, or if the entity identifies a
separate performance obligation for custodial services, as discussed below; and
• the entity cannot have the ability to use the product or to direct it to another
customer. If the entity has the ability to freely substitute goods to fill other orders,
control of the goods has not passed to the buyer. That is, the entity has retained
the right to use the customer’s product in a manner that best suits the entity.
If an entity concludes that it can recognise revenue for a bill-and-hold transaction,
paragraph B82 of IFRS 15 states that the entity needs to further consider whether it is
also providing custodial services for the customer that would be identified as a separate
performance obligation in the contract.
As discussed in 8.3.1 above, certain entities may use an Ex Works Incoterm in contracts
with customers. Under an Ex Works arrangement, the entity’s responsibility is to make
ordered goods available to the customer at the entity’s premises or another named
location. The customer is responsible for arranging, and paying for, shipment of the
goods to the desired location and bears all of the risks related to them once they are
made available.
We believe that all Ex Works arrangements need to be evaluated using the bill-and-hold
criteria discussed above to determine whether revenue recognition is appropriate prior
to shipment.
The standard provides the following example to illustrate the application guidance on
bill-and-hold arrangements. [IFRS 15.IE323-IE327].
Example 28.70: Bill-and-hold arrangement
An entity enters into a contract with a customer on 1 January 20X8 for the sale of a machine and spare parts.
The manufacturing lead time for the machine and spare parts is two years.
Upon completion of manufacturing, the entity demonstrates that the machine and spare parts meet the agreed-
upon specifications in the contract. The promises to transfer the machine and spare parts are distinct and result
in two performance obligations that each will be satisfied at a point in time. On 31 December 20X9, the customer
pays for the machine and spare parts, but only takes physical possession of the machine. Although the customer
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inspects and accepts the spare parts, the customer requests that the spare parts be stored at the entity’s warehouse
because of its close proximity to the customer’s factory. The customer has legal title to the spare parts and the
parts can be identified as belonging to the customer. Furthermore, the entity stores the spare parts in a separate
section of its warehouse and the parts are ready for immediate shipment at the customer’s request. The entity
expects to hold the spare parts for two to four years and the entity does not have the ability to use the spare parts
or direct them to another customer.
The entity identifies the promise to provide custodial services as a performance obligation because it is a
service provided to the customer and it is distinct from the machine and spare parts. Consequently, the entity
accounts for three performance obligations in the contract (the promises to provide the machine, the spare
parts and the custodial services). The transaction price is allocated to the three performance obligations and
revenue is recognised when (or as) control transfers to the customer.
Control of the machine transfers to the customer on 31 December 20X9 when the customer takes physical
possession. The entity assesses the indicators in paragraph 38 of IFRS 15 to determine the point in time at
which control of the spare parts transfers to the customer, noting that the entity has received payment, the
customer has legal title to the spare parts and the customer has inspected and accepted the spare parts. In
addition, the entity concludes that all of the criteria in paragraph B81 of IFRS 15 are met, which is necessary
for the entity to recognise revenue in a bill-and-hold arrangement. The entity recognises revenue for the spare
parts on 31 December 20X9 when control transfers to the customer.
The performance obligation to provide custodial services is satisfied over time as the services are provided.
The entity considers whether the payment terms include a significant financing component in accordance
with paragraphs 60-65 of IFRS 15.
8.7
Recognising revenue for licences of intellectual property
IFRS 15 provides application guidance for recognising of revenue from licences of
intellectual property that differs in some respects from the general requirements for
other promised goods or services. We discuss licensing in detail at 9 below.
8.8
Recognising revenue when a right of return
exists
As discussed at 5.7 above, a right of return does not represent a separate performance
obligation. Instead, the existence of a right of return affects the transaction price and
the entity must determine whether the customer will return the transferred product.
Under IFRS 15, as discussed at 6 above, an entity estimates the transaction price and
applies the constraint to the estimated transaction price. In doing so, it considers the
products expected to be returned in order to determine the amount to which the entity
expects to be entitled (excluding consideration for the products expected to be
returned). The entity recognises revenue based on the amounts to which the entity
expects to be entitled through to the end of the return period (considering expected
product returns). An entity does not recognise the portion of the revenue that is subject
to the constraint until the amount is no longer constrained, which could be at the end
of the return period or earlier if the entity’s expectations about the products expected
to be returned change prior to the end of the return period. The entity recognises the
amount received or receivable that is expected to be returned as a refund liability,
representing its obligation to return the customer’s consideration. An entity also updates
its estimates at the end of each reporting period. See 5.7 and 6.4 above for further
discussion on this topic.
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8.9
Recognising revenue for customer options for additional goods
or services
As discussed at 5.6 above, when an entity grants a customer the option to acquire
additional goods or services, that option is a separate performance obligation if it
provides a material right to the customer that the customer would not receive without
entering into the contract (e.g. a discount that exceeds the range of discounts typically
given for those goods or services to that class of customer in that geographical area or
market). If the option provides a material right to the customer, the customer has, in
effect, paid the entity in advance for future goods or services. IFRS 15 requires the entity
to allocate a portion of the transaction price to the material right at contract inception
(see 7.1.5 above). The revenue allocated to the material right is recognised when (or as)
the option is exercised (and the underlying future goods or services are transferred) or
when the option expires.
In contrast, if a customer option is not deemed to be a material right and is instead a
marketing offer, the entity does not account for the option and waits to account for the
underlying goods or services until those subsequent purchases occur.
See 5.6.1.H above for discussion on how an entity account would for the exercise of a
material right.
8.10 Breakage and prepayments for future goods or services
In certain industries, an entity collects non-refundable payments from its customers for
goods or services that the customer has a right to receive in the future. However, a
customer may ultimately leave that right unexercised (often referred to as ‘breakage’).
[IFRS 15.B45]. Retailers, for example, frequently sell gift cards that may not be partially
redeemed or completely redeemed and airlines sometimes sell non-refundable tickets
to passengers who allow the tickets to expire unused.
Under paragraph B44 of IFRS 15, when an entity receives consideration that is
attributable to a customer’s unexercised rights, the entity recognises a contract liability
equal to the full amount prepaid by the customer for the performance obligation to
transfer, or to stand ready to transfer, goods or services in the future. As discussed
further below, an entity derecognises that contract liability (and recognises revenue)
when it transfers those goods or services and, therefore, satisfies its performance
obligation. The Board noted that this application guidance requires the same pattern of
revenue recognition as the requirements for customer options (see 7.1.5 above).
[IFRS 15.BC398].
However, since entities may not be required by customers to fully satisfy their
performance obligations, paragraph B46 of IFRS 15 requires that when an entity expects
to be entitled to a breakage amount, the expected breakage would be recognised as
revenue in proportion to the pattern of rights exercised by the customer. If an entity
does not expect to be entitled to a breakage amount, it would not recognise any
breakage amounts as revenue until the likelihood of the customer exercising its right
becomes remote. [IFRS 15.B46, BC398].
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When estimating any breakage amount, an entity has to consider the constraint on
variable consideration, as discussed at 6.2.3 above. [IFRS 15.B46]. That is, if it is highly
probable that a significant revenue reversal would occur for any estimated breakage
amounts, an entity would not recognise those amounts until the breakage amounts are
no longer constrained.
Entities cannot recognise estimated breakage as revenue immediately upon receipt of
prepayment from the customer. The Board noted that it rejected such an approach
because the entity has not performed under the contract. That is, recognising revenue
would not be a faithful depiction of the entity’s performance and would understate its
obligation to stand ready to provide future goods or services. [IFRS 15.BC400]. This would
be the case even if an entity has historical evidence to support the view that no further
performance will be required for some portion of the customer contract(s).
Furthermore, in accordance with paragraph B47 of IFRS 15, regardless of whether an
entity can demonstrate the ability to reliably estimate breakage, entities would not
estimate or recognise any amounts attributable to a customer’s unexercised rights in
income (e.g. an unused gift card balance) if the amounts are required to be remitted to
another party (e.g. the government). Such an amount is recognised as a liability.
Consider the following example to illustrate how an entity would apply the above
application guidance to the sale of a gift card that is within the scope of IFRS 15
(see 3.4.1.I above for further discussion):
Example 28.71: Accounting for the sale of a gift card
Entity A sells a €500 non-refundable gift card that can be redeemed at any of its retail locations. Any unused
balance is not subject to laws that require from the entity to remit the payment to another party. When the gift
card is sold, Entity A recognises a contract liability of €500 (i.e. the full amount that was prepaid by the
customer). No breakage is recognised as revenue upon sale of the gift card.
Scenario A – Entity expects to be entitled to a breakage amount
Based on historical redemption rates, Entity A expects 90% of the gift card (or €450) to be redeemed. That
is, Entity A expects breakage of 10% (or €50). Upon its first use, the customer redeems €225 of the gift card.
That is, 50% of the expected redemption has occurred (i.e. €225 redemption / €450 total expected
redemption). Upon this redemption, Entity A recognises revenue and reduces the contract liability by €250.
This is equal to €225 for the transfer of goods or services purchased by the customer, as well a
s breakage of
€25 (50% redemption × €50 breakage estimate) that is recognised in proportion to the exercise of the
customer’s rights. Similar accounting would occur for future redemptions.
Scenario B – Entity does not expect to be entitled to a breakage amount
Based on historical redemption experiences that customers fully redeem similar gift cards (or possibly the
lack of historical experience due to a new gift card programme that means Entity A is unable to estimate the
redemption rates), Entity A does not expect to be entitled to a breakage amount. Upon its first use, the
customer redeems €225. Entity A recognises revenue and reduces the contract liability by the same amount
as the redemption (or €225). That is, no additional amounts are recognised for breakage. Similar accounting
would occur for future redemptions.
If no further redemptions occur, Entity A recognises the remaining gift card balance (or €275) as revenue
(and reduces the contract liability by the same amount) when the likelihood of the customer exercising its
remaining rights becomes remote.
As discussed above, the application guidance on breakage requires that an entity
recognise a liability for the full amount of the prepayment. It would then recognise
breakage on that liability proportionate to the pattern of rights exercised by the customer.
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If the prepayment element (e.g. the sale of a gift card, loyalty points) is part of a multiple-
element arrangement, an entity needs to allocate the transaction price between the
identified performance obligations. As a result, the deferred revenue associated with
this element would be less than the ‘prepaid’ amount received for the unsatisfied
performance obligations.
The following example depicts the sale of goods with loyalty points. In this example,
the amount allocated to the points (i.e. the ‘prepaid’ element) is less than the stand-alone
selling price of those points because of the allocation of the transaction price among the
two performance obligations. [IFRS 15.IE267-IE270].
Example 28.72: Customer loyalty programme
An entity has a customer loyalty programme that rewards a customer with one customer loyalty point for
every CU10 of purchases. Each point is redeemable for a CU1 discount on any future purchases of the entity’s
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 441
