whether the series requirement applies:
Figure 28.9:
The series requirement: determining the nature of the promise
Determine the nature of the promise
Delivery of a specified quantity of a
Delivery of an unspecified quantity
good or service (e.g. monthly payroll
of a service (e.g. stand-ready
obligation to provide an IT
processing for one year) that is
outsourcing service for one year)
satisfied over time
that is satisfied over time
Is each good or service distinct
Is each time increment distinct
and substantially the same?
and substantially the same?
Yes
No
Yes
No
Series
Not a series
Series
Not a series
It is important to highlight that even if the underlying activities an entity performs to satisfy
a promise vary significantly throughout the day and from day to day, that fact, by itself,
does not mean the distinct goods or services are not substantially the same. Consider an
example where the nature of the promise is to provide a daily hotel management service.
The service is comprised of activities that may vary each day (e.g. cleaning services,
reservation services or property maintenance). However, the entity determines that the
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daily hotel management services are substantially the same because the nature of the
entity’s promise is the same each day and the entity is providing the same overall
management service each day. See 5.2.2.C below for further discussion on determining
the nature of an entity’s promise and evaluating the ‘substantially the same’ criterion.
A July 2015 TRG agenda paper explained that, when considering the nature of the entity’s
promise and the applicability of the series requirement (including whether a good or service
is distinct), it may be helpful to consider which over-time criterion in paragraph 35 of IFRS 15
was met (i.e. why the entity concluded that the performance obligation is satisfied over
time).39 As discussed further at 8.1 below, a performance obligation is satisfied over time if
one of three criteria are met. For example, if a performance obligation is satisfied over time
because the customer simultaneously receives and consumes the benefits provided as the
entity performs (i.e. the first over-time criterion in paragraph 35(a) of IFRS 15), that may
indicate that each increment of service is capable of being distinct. If that is the case, the
entity would need to evaluate whether each increment of service is separately identifiable
(and substantially the same). If a performance obligation is satisfied over time based on the
other two criteria in paragraph 35 of IFRS 15 (i.e. (1) the entity’s performance creates or
enhances an asset that the customer controls as the asset is created or enhanced; or (2) the
entity’s performance does not create an asset with an alternative use to the entity and the
entity has an enforceable right to payment for performance completed to date), the nature of
that promise might be to deliver a single specified good or service (e.g. a contract to construct
a single piece of equipment), which would not be considered a series because the individual
goods or services within that performance obligation are not distinct.
An entity’s determination of whether a performance obligation is a single performance
obligation comprising a series of distinct goods or services or a single performance
obligation comprising goods or services that are not distinct from one another affects
the accounting in the following areas: (1) allocation of variable consideration (see 7
below); (2) contract modifications (see 4.4 above); and (3) changes in transaction price
(see 7.5 below). As the IASB discussed in the Basis for Conclusions and the TRG
members discussed at their March 2015 meeting, an entity considers the underlying
distinct goods or services in the contract, rather than the single performance obligation
identified under the series requirement, when applying the requirements for these three
areas of the model.40 [IFRS 15.BC115].
The following example, included in a March 2015 TRG agenda paper, illustrates how the
allocation of variable consideration may differ for a single performance obligation identified
under the series requirement and a single performance obligation comprising non-distinct
goods and/or services. Consider a five-year service contract that includes payment terms of
a fixed annual fee plus a performance bonus upon completion of a milestone at the end of
year two. If the entire service period is determined to be a single performance obligation
comprising a series of distinct services, the entity may be able to conclude that the variable
consideration (i.e. the bonus amount) should be allocated directly to its efforts to perform
the distinct services up to the date that the milestone is achieved (e.g. the underlying distinct
services in years one and two). This could result in the entity recognising the entire
bonus amount, if earned, at the end of year two (when it is highly probable that a significant
revenue reversal will not occur). See 5.2.2.C below for several examples of services for
which it would be reasonable to conclude that they meet the series requirement.41
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In contrast, if the entity determines that the entire service period is a single performance
obligation that is comprised of non-distinct services, the bonus would be included in
the transaction price (subject to the constraint on variable consideration – see 6.2.3
below) and recognised based on the measure of progress determined for the entire
service period. For example, assume the bonus becomes part of the transaction price at
the end of year two (when it is highly probable that a significant revenue reversal will
not occur). In that case, a portion of the bonus would be recognised at that the end of
year two based on performance completed to date and a portion would be recognised
as the remainder of the performance obligation is satisfied. As a result, the bonus amount
would be recognised as revenue through to the end of the five-year service period.
The series requirement is a new concept. We believe that entities may need to apply
significant judgement when determining whether a promised good or service in a
contract with a customer meets the criteria to be accounted for as a series of distinct
goods or services. As illustrated in 5.2.2.C below, promised goods or services that meet
the series criteria are not limited to a particular industry and can encompass a wide array
of promised goods or services.
Entities should consider whether they need to add or make changes to their business
processes or internal controls as a result of this new requirement.
5.2.2.A
The series requirement: Consecutive transfer of goods or services
In March 2015, the TRG members discussed whether the goods or services must be
consecutively transferred to be considered under the series requirement. The TRG
members generally agreed that a series of distinct goods or services need not be
consecutively transferred. That is, the series requirement mu
st be applied even when
there is a gap or an overlap in an entity’s transfer of goods or services, provided that the
other criteria are met.42 The IASB TRG members also noted that entities may need to
carefully consider whether the series requirement applies, depending on the length of
the gap between an entity’s transfer of goods or services.
Stakeholders had asked this question because the Basis for Conclusions uses the term
‘consecutively’ when it discusses the series requirement. [IFRS 15.BC113, BC116]. However,
the TRG agenda paper concluded that the Board’s discussion was not meant to imply
that the series requirement only applies to circumstances in which the entity provides
the same good or service consecutively over a period of time.
The TRG agenda paper included an example of a contract under which an entity
provides a manufacturing service producing 24,000 units of a product over a two-year
period. The conclusion in the TRG agenda paper was that the criteria for the series
requirement in paragraph 23 of IFRS 15 were met because the units produced under
the service arrangement were substantially the same and were distinct services that
would be satisfied over time (see 8.1 below). This is because the units are
manufactured to meet the customer’s specifications (i.e. the entity’s performance does
not create an asset with alternative use to the entity). Furthermore, if the contract
were to be cancelled, the entity would have an enforceable right to payment (cost plus
a reasonable profit margin).43
The conclusion in the TRG agenda paper was not influenced by whether the entity
would perform the service evenly over the two-year period (e.g. produce 1,000 units
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per month). That is, the entity could produce 2,000 units in some months and none in
others, but this would not be a determining factor in concluding whether the contract
met the criteria to be accounted for as a series.
5.2.2.B
The series requirement versus treating the distinct goods or services as
separate performance obligations
At the March 2015 TRG meeting, the TRG members were asked whether, in order to apply
the series requirement, the accounting result needs to be the same as if the underlying
distinct goods or services were accounted for as separate performance obligations.
The TRG members generally agreed that the accounting result does not need to be the
same. Furthermore, an entity is not required to prove that the result would be the same
as if the goods or services were accounted for as separate performance obligations.44
5.2.2.C
Assessing whether a performance obligation consists of distinct goods or
services that are ‘substantially the same’
At the July 2015 TRG meeting, the TRG members were asked to consider how an entity
would assess whether a performance obligation consists of distinct goods or services
that are ‘substantially the same’ in order to apply the series requirement.45
As discussed above, the TRG members generally agreed that the TRG paper, which
primarily focused on the application of the series requirement to service contracts, will
help entities understand how to determine whether a performance obligation consists
of distinct goods or services that are ‘substantially the same’ under IFRS 15.
The TRG agenda paper noted that, when making the evaluation of whether goods or
services are distinct and substantially the same, an entity first needs to determine the nature
of the entity’s promise in providing services to the customer. 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 should consider 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 would consider whether each time increment (e.g. hour,
day), rather than the underlying activities, is distinct and substantially the same. The TRG
agenda paper noted that the Board intended that 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.
As discussed at 5.2.2 above, it is important to highlight that the underlying activities an entity
performs to satisfy a performance obligation could vary significantly throughout a day and
from day to day. However, the TRG agenda paper noted that this is not determinative in the
assessment of whether a performance obligation consists of goods or services that are
distinct and substantially the same. Consider an example where the nature of the promise is
to provide a daily hotel management service. The hotel management service comprises
various activities that may vary each day (e.g. cleaning services, reservation services,
property maintenance). However, the entity determines that the daily hotel management
services are substantially the same because the nature of the entity’s promise is the same
each day and the entity is providing the same overall management service each day.
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The TRG agenda paper included several examples of promised goods or services that
may meet the series requirement and the analysis that supports that conclusion. The
evaluation of the nature of the promise for each example is consistent with Example 13
of IFRS 15, [IFRS 15.IE67-IE68], on monthly payroll processing. Below we have summarised
some of the examples and analysis in the TRG agenda paper.
Example 28.17: IT outsourcing46
A vendor and customer execute a 10-year information technology (IT) outsourcing arrangement in which the
vendor continuously delivers the outsourced activities over the contract term (e.g. it provides server capacity,
manages the customer’s software portfolio, runs an IT help desk). The total monthly invoice is calculated
based on different units consumed for the respective activities. The vendor concludes that the customer
simultaneously receives and consumes the benefits provided by its services as it performs (meeting the over-
time criterion in paragraph 35(a) of IFRS 15).
The vendor first considers the nature of its promise to the customer. Because the vendor has promised to provide
an unspecified quantity of activities, rather than a defined number of services, the TRG agenda paper noted that
the vendor could reasonably conclude that the nature of the promise is an obligation to stand ready to provide the
integrated outsourcing service each day. If the nature of the promise is the overall IT outsourcing service, each
day of service could be considered distinct because the customer can benefit from each day of service on its own
and each day is separately identifiable. The TRG agenda paper also noted that the vendor could reasonably
conclude that each day of service is substantially the same. That is, even if the individual activities that comprise
the performance obligation vary from day to day, the nature of the overall promise is the same from day to day.
Accordingly, it would be reasonable for an entity to conclude that this contract meets the seri
es requirement.
Example 28.18: Transaction processing47
A vendor enters into a 10-year contract with a customer to provide continuous access to its system and to
process all transactions on behalf of the customer. The customer is obligated to use the vendor’s system, but
the ultimate quantity of transactions is unknown. The vendor concludes that the customer simultaneously
receives and consumes the benefits as it performs.
If the vendor concludes that the nature of its promise is to provide continuous access to its system, rather than
process a particular quantity of transactions, it might conclude that there is a single performance obligation to stand
ready to process as many transactions as the customer requires. If that is the case, the TRG agenda paper noted that
it would be reasonable to conclude that there are multiple distinct time increments of the service. Each day of access
to the service provided to the customer could be considered substantially the same since the customer is deriving a
consistent benefit from the access each day, even if a different number of transactions are processed each day.
If the vendor concludes that the nature of the promise is the processing of each transaction, the TRG agenda
paper noted that each transaction processed could be considered substantially the same even if there are
multiple types of transactions that generate different payments. Furthermore, the TRG agenda paper noted
that each transaction processed could be a distinct service because the customer could benefit from each
transaction on its own and each transaction could be separately identifiable. Accordingly, it would be
reasonable for an entity to conclude that this contract meets the series requirement.
Example 28.19: Hotel management48
A hotel manager (HM) enters into a 20-year contract to manage properties on behalf of a customer. HM
receives monthly consideration of 1% of the monthly rental revenue, as well as reimbursement of labour costs
incurred to perform the service and an annual incentive payment. HM concludes that the customer
simultaneously receives and consumes the benefits of its services as it performs.
HM considers the nature of its promise to the customer. If the nature of its promise is the overall management
service (because the underlying activities are not distinct from each other), the TRG agenda paper noted that
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