highly interrelated if each of the promised goods or services is significantly affected by
one or more of the other goods or services in the contract. As discussed above, the Board
clarified that an entity would evaluate how two or more promised goods or services affect
each other and not just evaluate whether one item, by its nature, depends on the other.
That is, an entity needs to evaluate whether there is a two-way dependency or
transformative relationship between the promised goods or services to determine
whether the promises are highly interdependent or highly interrelated.
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In the Basis for Conclusions on IFRS 15, the Board provided the following example. An
entity promises to design an experimental new product for a customer and to
manufacture ten prototype units of that product. Because the product and
manufacturing process is unproven, the entity is required to continue to revise the
design of the product during the construction and test of the prototypes and make any
necessary modifications to in-progress or completed prototypes. The entity expects
that most, or all, of the units to be produced will require some rework because of design
changes made during the production process. That is, the customer is not likely to be
able to choose whether to purchase only the design service or the manufacturing service
without one significantly affecting the other. The entity determines that the design and
manufacturing promises are highly interdependent on, and highly interrelated with, the
other promises in the contract. Consequently, although each promise may provide a
benefit on its own, the promises are not separately identifiable within the context of the
contract. [IFRS 15.BC112].
Conversely, if the design was similar to that of a previous product and/or the entity did
not expect to have to rework the prototypes due to design changes, the entity might
determine that the two promises are not highly interdependent or highly interrelated
and might conclude the contract contains multiple performance obligations.
Goods or services may not be separately identifiable if they are so highly
interdependent, on or highly interrelated with, other goods or services under the
contract. This may occur when the customer’s decision not to purchase one promised
good or service would significantly affect the other promised goods or services. In
other words, the promised goods or services are so highly interrelated or highly
interdependent with each other that the entity could not fulfil an individual promise
independently from the other promises in the contract. This concept regarding an
entity’s ability to separately fulfil a promise to a customer is highlighted in
Example 28.22, Case E (see 5.2.3 below). Example 28.22, Case E, includes a contract
for the sale of equipment and specialised consumables to be used with the
equipment. In this example, the entity determines that the equipment and
consumables are not highly interdependent or highly interrelated because the two
promises do not significantly affect each other. As part of its analysis, the entity
concludes that it would be able to fulfil each of its promises in the contract
independently of the other promises.
(b) March 2018 IFRS Interpretations Committee discussion
In 2017, the IFRS Interpretations Committee received a request regarding the
identification of performance obligations in a contract for the sale of a real estate unit
that includes the transfer of land. The request also asked about the timing of revenue
recognition for each performance obligation (either over-time or at a point in time),
which is discussed in 8.1.4.G below. At its March 2018 meeting, the IFRS Interpretations
Committee concluded that the principles and requirements in IFRS 15 provide sufficient
guidance for an entity to recognise revenue in a contract for the sale of a real estate unit
that includes the transfer of land. Consequently, the IFRS Interpretations Committee
decided not to add this matter to its agenda.35
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In considering this request, the IFRS Interpretations Committee noted that the
assessment of the distinct criteria requires judgement. Furthermore:
• The assessment of the first criterion is ‘based on the characteristics of the goods or
services themselves. Accordingly, an entity disregards any contractual limitations
that might preclude the customer from obtaining readily available resources from
a source other than the entity’ (see 5.2.1.A above). [IFRS 15.BC100].
• The objective underlying the second criterion is to determine the nature of the
promise within the context of the contract. That is, whether the entity has
promised to transfer either the promised goods or services individually or a
combined item to which those goods or services are inputs. IFRS 15 also includes
some factors that indicate that two or more promises to transfer goods or services
are not separately identifiable. [IFRS 15.29]. However, these factors are not intended
to be criteria that an entity evaluates independently of the ‘separately identifiable’
principle because, in some instances, one or more of the factors may be less
relevant to the evaluation of that principle (see the discussion above).
[IFRS 15.BC116N].
In the Basis for Conclusion, the Board indicated that the separately identifiable
concept is influenced by the idea of separable risks. That is, whether the risk
assumed to fulfil the obligation to transfer one of the promised goods or services
to the customer is separable from the risk relating to the transfer of the other
promised goods or services. Evaluating whether an entity’s promise is separately
identifiable considers the interrelationship between the goods or services within
the contract in the context of the process to fulfil the contract. Accordingly, an
entity considers the level of integration, interrelation or interdependence among
the promises in the contract to transfer goods or services. An entity evaluates
whether, in the process of fulfilling the contract, there is a transformative
relationship between the promises, rather than considering whether one item, by
its nature, depends on another (i.e. whether the promises have a functional
relationship). [IFRS 15.BC105, 116J, 116K].
The IFRS Interpretations Committee discussed the identification of performance
obligations in its March 2018 meeting using the following example from the IFRS
Interpretations Committee agenda paper:36
Example 28.16: Identification of performance obligations in a contract for the sale
of a real estate unit that includes the transfer of land
Entity A enters into a non-cancellable contract with a customer for the sale of a real estate unit that involves
the transfer of a plot of land and a building that Entity A constructs on that land. The land represents all of
the area on which the building will be constructed and the contract is for the entire building.
At contract inception, Entity A transfers the legal title of the land and the customer pays the price specified
in the contract for it. The transfer of legal title to the customer cannot be revoked, regardless of what happens
during the construction of the building. Throughout the c
onstruction period, the customer makes milestone
payments that do not necessarily correspond to the amount of work completed to date.
The design and specification of the building were agreed between the counterparties before the contract
was signed. However, during the construction of the building, the customer can request changes to the
design and specification that are priced by Entity A based on a methodology specified in the contract. If
the customer decides to proceed with the proposed changes, Entity A can reject them only for a limited
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number of reasons (e.g. when the change would breach planning permission). Entity A can only request
changes if not doing so would lead to an unreasonable increase in costs or delay construction. However,
the customer must approve those changes.
Entity A first assesses whether the land and the building are each capable of being distinct in accordance with
paragraph 27(a) of IFRS 15. Entity A determines that the customer could benefit from the land on its own or
together with other resources readily available to it e.g. by hiring another developer to construct a building
on the land. Also, Entity A determines that the customer could benefit from the construction of the building
on its own or together with other resources readily available to it. For example, by obtaining the construction
services from Entity A or another developer without transferring the land. Therefore, Entity A concludes that
the land and the building are each capable of being distinct.
The criterion in paragraph 27(b) of IFRS 15 is then assessed by Entity A in order to determine whether the
land and the building are distinct in the context of the contract. In making this assessment, Entity A considers
the factors in paragraph 29 of IFRS 15, including the following:
a.
Whether it provides a significant service of integrating the land and the building into a combined output.
Entity A analyses the transformative relationship between the transfer of the land and the construction
of the building in the process of fulfilling the contract. In making this analysis it considers whether its
performance in constructing the building would be different if it did not also transfer the land and vice
versa. Despite the functional relationship between the land and the building (because the building cannot
exist without the land on which its foundations will be built), the risks assumed by Entity A in
transferring the land may, or may not, be separable from those assumed in constructing the building.
b. Whether the land and the building are highly interdependent or highly interrelated. Entity A determines
whether its promise to transfer the land could be fulfilled if it did not also construct the building and vice versa.
The IFRS Interpretations Committee concluded that the two promises would be separately identifiable if
Entity A concluded that ‘(a) its performance in constructing the building would be the same regardless of
whether it also transferred the land; and (b) it would be able to fulfil its promise to construct the building even
if it did not also transfer the land, and would be able to fulfil its promise to transfer the land even if it did not
also construct the building.’37
(c) Examples
The IASB included a number of examples in the standard that illustrate the application
of the requirements for identifying performance obligations. The examples include
analysis of how an entity may determine whether the promises to transfer goods or
services are distinct within the context of the contract. See 5.2.3 below for full extracts
of several of these examples.
IAS 18 indicated that an entity may need to apply its recognition criteria to separately
identifiable elements in order to reflect the substance of the transaction. However, it
did not provide additional application guidance for determining those separate
elements. As such, the requirements in IFRS 15 may change practice.
Many IFRS preparers developed their legacy IFRS accounting policies by reference to
legacy US GAAP. Whether the new standard results in a change in practice may depend
on which US GAAP requirements they had considered when developing their policies.
The first step of the two-step process to determine whether goods or services are distinct
is similar to the principles for determining separate units of accounting under legacy
US GAAP requirements in ASC 605-25 – Revenue Recognition – Multiple-Element
Arrangements. However, the second step of considering the goods or services within the
context of the contract is a new requirement that entities have found especially
challenging to apply. Therefore, entities need to carefully evaluate this second step to
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determine whether their historical units of account for revenue recognition may need to
change. This evaluation may require an entity to use significant judgement.
Entities that had previously looked to other legacy US GAAP requirements to develop
their accounting policies, such as ASC 985-605 – Software – Revenue Recognition,
may also reach different conclusions under IFRS 15.
It is important to note that the assessment of whether a good or service is distinct must
consider the specific contract with a customer. That is, an entity cannot assume that a
particular good or service is distinct (or not distinct) in all instances. The manner in which
promised goods or services are bundled within a contract can affect the conclusion of
whether a good or service is distinct. We anticipate that entities may treat the same goods or
services differently, depending on how those goods or services are bundled within a contract.
5.2.2
Series of distinct goods or services that are substantially the same
and have the same pattern of transfer
As discussed above, paragraph 22(b) of IFRS 15 defines, as a second type of performance
obligation, a promise to transfer to the customer a series of distinct goods or services
that are substantially the same and that have the same pattern of transfer, if both of the
following criteria from paragraph 23 of IFRS 15 are met: [IFRS 15.22(b), 23]
• each distinct good or service in the series that the entity promises to transfer
represents a performance obligation that would be satisfied over time in
accordance with paragraph 35 of IFRS 15 (see 5.2.2.A and 8.1 below), if it were
accounted for separately; and
• the entity would measure its progress toward satisfaction of the performance
obligation using the same measure of progress for each distinct good or service in
the series (see 8.2 below).
Figure 28.8:
The series requirement criteria
Distinct and
Same
One
Satisfied
substantially
measure of
performance
+
+
=
over time
the same
progress
obligation
If a series of distinct goods or services meets the criteria in paragraph 22(b) of IFRS 15
and paragraph 23 of IFRS 15 (i.e. the series requirement), an entity is required to treat
that series as a single performance obligation (i.e. it is not optional). The Board
incorporated this requirement to simplify the model and promote consistent
<
br /> identification of performance obligations in cases when an entity provides the same
good or service over a period of time. [IFRS 15.BC113]. Without the series requirement,
the Board noted that applying the revenue model might present operational
challenges because an entity would have to identify multiple distinct goods or
services, allocate the transaction price to each distinct good or service on a stand-
alone selling price basis and then recognise revenue when those performance
obligations are satisfied. The IASB determined that this would not be cost effective.
Instead, an entity identifies a single performance obligation and allocates the
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2057
transaction price to that performance obligation. It will then recognise revenue by
applying a single measure of progress to that performance obligation. [IFRS 15.BC114].
For distinct goods or services to be accounted for as a series, one of the criteria is that they
must be substantially the same. This is often the most difficult criterion for entities to assess.
In the Basis for Conclusions, the Board provided three examples of repetitive services
(i.e. cleaning, transaction processing and delivering electricity) that meet the series
requirement. [IFRS 15.BC114]. In addition, the TRG members generally agreed that when
determining whether distinct goods or services are substantially the same, entities need to
first determine the nature of their promise. This is because a series could consist of either
specified quantities of the underlying good or service delivered (e.g. each unit of a good) or
distinct time increments (e.g. an hourly service), depending on the nature of the promise.
That is, if the nature of the promise is to deliver a specified quantity of service (e.g. monthly
payroll services over a defined contract period), the evaluation considers whether each
service is distinct and substantially the same. In contrast, if the nature of the entity’s promise
is to stand ready or provide a single service for a period of time (i.e. because there is an
unspecified quantity to be delivered), the evaluation considers whether each time increment
(e.g. hour, day), rather than the underlying activities, is distinct and substantially the same.38
Figure 28.9 illustrates how the determination of the nature of the promise might affect
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 406