International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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each day of service could be considered distinct because the customer can benefit from each day of service
on its own and each day of service is separately identifiable.
Assuming the nature of the promise is the overall management service, the TRG agenda paper noted that the
service performed each day could be considered distinct and substantially the same. This is because, even if the
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individual activities that comprise the performance obligation vary significantly throughout the day and from
day to day, the nature of the overall promise to provide the management service is the same from day to day.
Accordingly, it would be reasonable for an entity to conclude that this contract meets the series requirement.
5.2.2.D
When to apply the series requirement
As discussed above, if a series of distinct goods or services meets the criteria in
paragraphs 22(b) and 23 of IFRS 15, an entity is required to treat that series as a single
performance obligation (i.e. it is not an optional requirement). [IFRS 15.22(b), 23].
5.2.3
Examples of identifying performance obligations
The standard includes several examples that illustrate the application of the requirements
for identifying performance obligations. The examples explain the judgements made to
determine whether the promises to transfer goods or services are capable of being distinct
and distinct within the context of the contract. We have extracted these examples below.
The following example illustrates contracts with promised goods or services that, while
capable of being distinct, are not distinct within the context of the contract because of
a significant integration service that combines the inputs (the underlying goods or
services) into a combined output. [IFRS 15.IE45-IE48C].
Example 28.20: Goods or services are not distinct
Case A – Significant integration service
An entity, a contractor, enters into a contract to build a hospital for a customer. The entity is responsible for
the overall management of the project and identifies various promised goods and services, including
engineering, site clearance, foundation, procurement, construction of the structure, piping and wiring,
installation of equipment and finishing.
The promised goods and services are capable of being distinct in accordance with paragraph 27(a) of IFRS 15.
That is, the customer can benefit from the goods and services either on their own or together with other readily
available resources. This is evidenced by the fact that the entity, or competitors of the entity, regularly sells many
of these goods and services separately to other customers. In addition, the customer could generate economic
benefit from the individual goods and services by using, consuming, selling or holding those goods or services.
However, the promises to transfer the goods and services are not separately identifiable in accordance with
paragraph 27(b) of IFRS 15 (on the basis of the factors in paragraph 29 of IFRS 15). This is evidenced by the
fact that the entity provides a significant service of integrating the goods and services (the inputs) into the
hospital (the combined output) for which the customer has contracted.
Because both criteria in paragraph 27 of IFRS 15 are not met, the goods and services are not distinct. The
entity accounts for all of the goods and services in the contract as a single performance obligation.
Case B – Significant integration service
An entity enters into a contract with a customer that will result in the delivery of multiple units of a highly
complex, specialised device. The terms of the contract require the entity to establish a manufacturing process
in order to produce the contracted units. The specifications are unique to the customer, based on a custom
design that is owned by the customer and that were developed under the terms of a separate contract that is
not part of the current negotiated exchange. The entity is responsible for the overall management of the
contract, which requires the performance and integration of various activities including procurement of
materials, identifying and managing subcontractors, and performing manufacturing, assembly and testing.
The entity assesses the promises in the contract and determines that each of the promised devices is capable
of being distinct in accordance with paragraph 27(a) of IFRS 15 because the customer can benefit from each
device on its own. This is because each unit can function independently of the other units.
The entity observes that the nature of its promise is to establish and provide a service of producing the full
complement of devices for which the customer has contracted in accordance with the customer’s specifications.
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The entity considers that it is responsible for overall management of the contract and for providing a significant
service of integrating various goods and services (the inputs) into its overall service and the resulting devices
(the combined output) and, therefore, the devices and the various promised goods and services inherent in
producing those devices are not separately identifiable in accordance with paragraph 27(b) and paragraph 29 of
IFRS 15. In this case, the manufacturing process provided by the entity is specific to its contract with the
customer. In addition, the nature of the entity’s performance and, in particular, the significant integration service
of the various activities means that a change in one of the entity’s activities to produce the devices has a
significant effect on the other activities required to produce the highly complex, specialised devices such that the
entity’s activities are highly interdependent and highly interrelated. Because the criterion in paragraph 27(b) of
IFRS 15 is not met, the goods and services that will be provided by the entity are not separately identifiable and,
therefore, are not distinct. The entity accounts for all of the goods and services promised in the contract as a
single performance obligation.
The determination of whether a ‘significant integration service’ exists within a
contract, as illustrated in Case A and Case B above, requires significant judgement and
is heavily dependent on the unique facts and circumstances for each individual
contract with a customer.
The following example illustrates how the significance of installation services can affect
an entity’s conclusion about the number of identified performance obligations for
similar fact patterns. [IFRS 15.IE49-IE58]. In Case A, each of the promised goods or services
are determined to be distinct. In Case B, two of the promised goods or services are
combined into a single performance obligation because one promise (the installation)
significantly customises another promise (the software).
Example 28.21: Determining whether goods or services are distinct (Case A and
Case B)
Case A – Distinct goods or services
An entity, a software developer, enters into a contract with a customer to transfer a software licence, perform
an installation service and provide unspecified software updates and technical support (online and telephone)
for a two-year period. The entity sells the licence, installation service and technical support separately. The
installation service includes changing the web screen for each type of user (for example, marketing, inventory
management and information techn
ology). The installation service is routinely performed by other entities
and does not significantly modify the software. The software remains functional without the updates and the
technical support.
The entity assesses the goods and services promised to the customer to determine which goods and services are
distinct in accordance with paragraph 27 of IFRS 15. The entity observes that the software is delivered before the
other goods and services and remains functional without the updates and the technical support. The customer can
benefit from the updates together with the software licence transferred at the start of the contract. Thus, the entity
concludes that the customer can benefit from each of the goods and services either on their own or together with
the other goods and services that are readily available and the criterion in paragraph 27(a) of IFRS 15 is met.
The entity also considers the principle and the factors in paragraph 29 of IFRS 15 and determines that the promise
to transfer each good and service to the customer is separately identifiable from each of the other promises (thus the
criterion in paragraph 27(b) of IFRS 15 is met). In reaching this determination, the entity considers that, although it
integrates the software into the customer’s system, the installation services do not significantly affect the customer’s
ability to use and benefit from the software licence because the installation services are routine and can be obtained
from alternative providers. The software updates do not significantly affect the customer’s ability to use and benefit
from the software licence during the licence period. The entity further observes that none of the promised goods or
services significantly modify or customise one another, nor is the entity providing a significant service of integrating
the software and the services into a combined output. Lastly, the entity concludes that the software and the services
do not significantly affect each other and, therefore, are not highly interdependent or highly interrelated, because
the entity would be able to fulfil its promise to transfer the initial software licence independently from its promise
to subsequently provide the installation service, software updates or technical support.
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On the basis of this assessment, the entity identifies four performance obligations in the contract for the
following goods or services:
(a) the software licence;
(b) an installation service;
(c) software updates; and
(d) technical
support.
The entity applies paragraphs 31-38 of IFRS 15 to determine whether each of the performance obligations
for the installation service, software updates and technical support are satisfied at a point in time or over time.
The entity also assesses the nature of the entity’s promise to transfer the software licence in accordance with
paragraph B58 of IFRS 15 (see Example 54 in paragraphs IE276-IE277).
Case B – Significant customisation
The promised goods and services are the same as in Case A, except that the contract specifies that, as part of
the installation service, the software is to be substantially customised to add significant new functionality to
enable the software to interface with other customised software applications used by the customer. The
customised installation service can be provided by other entities.
The entity assesses the goods and services promised to the customer to determine which goods and services are
distinct in accordance with paragraph 27 of IFRS 15. The entity first assesses whether the criterion in
paragraph 27(a) has been met. For the same reasons as in Case A, the entity determines that the software licence,
installation, software updates and technical support each meet that criterion. The entity next assesses whether the
criterion in paragraph 27(b) has been met by evaluating the principle and the factors in paragraph 29 of IFRS 15.
The entity observes that the terms of the contract result in a promise to provide a significant service of integrating
the licensed software into the existing software system by performing a customised installation service as specified
in the contract. In other words, the entity is using the licence and the customised installation service as inputs to
produce the combined output (i.e. a functional and integrated software system) specified in the contract (see
paragraph 29(a) of IFRS 15).The software is significantly modified and customised by the service (see
paragraph 29(b) of IFRS 15). Consequently, the entity determines that the promise to transfer the licence is not
separately identifiable from the customised installation service and, therefore, the criterion in paragraph 27(b) of
IFRS 15 is not met. Thus, the software licence and the customised installation service are not distinct.
On the basis of the same analysis as in Case A, the entity concludes that the software updates and technical
support are distinct from the other promises in the contract.
On the basis of this assessment, the entity identifies three performance obligations in the contract for the
following goods or services:
(a) software customisation (which comprises the licence for the software and the customised installation service;
(b) software updates; and
(c) technical
support.
The entity applies paragraphs 31-38 of IFRS 15 to determine whether each performance obligation is satisfied
at a point in time or over time.
The following examples illustrate contracts that include multiple promised goods or
services, all of which are determined to be distinct. The example highlights the
importance of considering both the separately identifiable principle and the underlying
factors in paragraph 29 of IFRS 15. [IFRS 15.IE58A-IE58K].
Case C illustrates a contract that includes the sale of equipment and installation services.
The equipment can be operated without any customisation or modification. The
installation is not complex and can be performed by other vendors. The entity
determines that the two promises in the contract are distinct.
Case D illustrates that certain types of contractual restrictions, including those that
require a customer to only use the entity’s services, should not affect the evaluation of
whether a promised good or service is distinct.
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Case E illustrates a contract that includes the sale of equipment and specialised
consumables to be used with the equipment. Even though the consumables can only be
produced by the entity, they are sold separately. The entity determines that the two
promises in the contract are distinct and the example walks through the analysis for
determining whether the promises are capable of being distinct and distinct in the
context of the contract. As part of this analysis, the entity concludes that the equipment
and consumables are not highly interrelated nor highly interdependent because the two
promises do not significantly affect each other. That is, the entity would be able to fulfil
each of its promises in the contract independently of the other promises.
Example 28.22: Determining whether goods or services are distinct (Case C –
Case E)
Case C – Promises are separately identifiable (installation)
An entity contracts with a customer to sell a piece of equipment and installation services. The equipment is
operational withou
t any customisation or modification. The installation required is not complex and is capable
of being performed by several alternative service providers.
The entity identifies two promised goods and services in the contract: (a) equipment and (b) installation. The
entity assesses the criteria in paragraph 27 of IFRS 15 to determine whether each promised good or service is
distinct. The entity determines that the equipment and the installation each meet the criterion in paragraph 27(a)
of IFRS 15. The customer can benefit from the equipment on its own, by using it or reselling it for an amount
greater than scrap value, or together with other readily available resources (for example, installation services
available from alternative providers). The customer also can benefit from the installation services together with
other resources that the customer will already have obtained from the entity (i.e. the equipment).
The entity further determines that its promises to transfer the equipment and to provide the installation
services are each separately identifiable (in accordance with paragraph 27(b) of IFRS 15). The entity
considers the principle and the factors in paragraph 29 of IFRS 15 in determining that the equipment and the
installation services are not inputs to a combined item in this contract. In this case, each of the factors in
paragraph 29 of IFRS 15 contributes to, but is not individually determinative of, the conclusion that the
equipment and the installation services are separately identifiable as follows:
(a) The entity is not providing a significant integration service. That is, the entity has promised to deliver
the equipment and then install it; the entity would be able to fulfil its promise to transfer the equipment
separately from its promise to subsequently install it. The entity has not promised to combine the
equipment and the installation services in a way that would transform them into a combined output.
(b) The entity’s installation services will not significantly customise or significantly modify the equipment.
(c) Although the customer can benefit from the installation services only after it has obtained control of the
equipment, the installation services do not significantly affect the equipment because the entity would
be able to fulfil its promise to transfer the equipment independently of its promise to provide the