contract is a significant change from previous practice. This exception gives entities the
ability to better reflect the economics of the transaction in certain circumstances.
However, the criteria that must be met to demonstrate that a discount is associated with
only some of the performance obligations in the contract is likely to limit the number of
transactions that are eligible for this exception.
7.4.1
Implementation questions on the discount allocation exception
7.4.1.A
Interaction between the two allocation exceptions: variable discounts
A discount that is variable in amount and/or contingent on the occurrence or non-
occurrence of future events will also meet the definition of variable consideration
(see 6.2 above). As a result, some stakeholders had questioned which exception would
apply – allocating a discount or allocating variable consideration.
At the March 2015 TRG meeting, the TRG members generally agreed that an entity will
first determine whether a variable discount meets the variable consideration exception
(see 7.3 above). [IFRS 15.86]. If it does not, the entity then considers whether it meets the
discount exception (see 7.4 above).
In reaching that conclusion, the TRG agenda paper noted that paragraph 86 of IFRS 15
establishes a hierarchy for allocating variable consideration that requires an entity to
identify variable consideration and then determine whether it should allocate variable
consideration to one or some, but not all, performance obligations (or distinct goods or
services that comprise a single performance obligation) based on the exception for
allocating variable consideration. The entity would consider the requirements for
allocating a discount only if the discount is not variable consideration (i.e. the amount
of the discount is fixed and not contingent on future events) or the entity does not meet
the criteria to allocate variable consideration to a specific part of the contract.97
7.5
Changes in transaction price after contract inception
The standard requires entities to determine the transaction price at contract inception.
However, there could be changes to the transaction price after contract inception. For
example, as discussed in 6.2.4 above, when a contract includes variable consideration,
entities need to update their estimate of the transaction price at the end of each
reporting period to reflect any changes in circumstances. Changes in the transaction
price can also occur due to contract modifications (see 4.4 above).
As stated in paragraphs 88-89 in IFRS 15, changes in the total transaction price are generally
allocated to the performance obligations on the same basis as the initial allocation, whether
they are allocated based on the relative stand-alone selling price (i.e. using the same
proportionate share of the total) or to individual performance obligations under the variable
consideration exception discussed at 7.3 above. Amounts allocated to a satisfied performance
obligation should be recognised as revenue, or a reduction in revenue, in the period that the
transaction price changes. As discussed at 7.1 above, stand-alone selling prices are not
updated after contract inception, unless the contract has been modified. Furthermore, any
2170 Chapter 28
amounts allocated to satisfied (or partially satisfied) performance obligations should be
recognised in revenue in the period in which the transaction price changes (i.e. on a
cumulative catch-up basis). This could result in either an increase or decrease to revenue in
relation to a satisfied performance obligation or to cumulative revenue recognised for a
partially satisfied over time performance obligation (see 8.1 below). [IFRS 15.88-89].
If the change in the transaction price is due to a contract modification, the contract
modification requirements in paragraphs 18-21 of IFRS 15 must be followed (see 4.4
above for a discussion on contract modifications). [IFRS 15.90].
However, when contracts include variable consideration, it is possible that changes in
the transaction price that arise after a modification may (or may not) be related to
performance obligations that existed before the modification. For changes in the
transaction price arising after a contract modification that is not treated as a separate
contract, an entity must apply one of the two approaches: [IFRS 15.90]
• if the change in transaction price is attributable to an amount of variable
consideration promised before the modification and the modification was
considered a termination of the existing contract and the creation of a new
contract, the entity allocates the change in transaction price to the performance
obligations that existed before the modification; or
• in all other cases, the change in the transaction price is allocated to the
performance obligations in the modified contract (i.e. the performance obligations
that were unsatisfied and partially unsatisfied immediately after the modification).
The first approach is applicable to a change in transaction price that occurs after a contract
modification that is accounted for in accordance with paragraph 21(a) of IFRS 15 (i.e. as a
termination of the existing contract and the creation of a new contract) and the change in
the transaction price is attributable to variable consideration promised before the
modification. For example, an estimate of variable consideration in the initial contract
may have changed or may no longer be constrained. [IFRS 15.21(a), 90(a)]. In this scenario, the
Board decided that an entity should allocate the corresponding change in the transaction
price to the performance obligations identified in the contract before the modification
(e.g. the original contract), including performance obligations that were satisfied prior to
the modification. [IFRS 15.BC83]. That is, it would not be appropriate for an entity to allocate
the corresponding change in the transaction price to the performance obligations that are
in the modified contract if the promised variable consideration (and the resolution of the
associated uncertainty) were not affected by the contract modification.
The second approach is applicable in all other cases when a modification is not treated
as a separate contract (e.g. when the change in the transaction price is not attributable
to variable consideration promised before the modification). [IFRS 15.90(b)].
7.6
Allocation of transaction price to components outside the scope
of IFRS 15
Revenue arrangements frequently contain multiple elements, including some components
that are not within the scope of IFRS 15. As discussed further at 3.4 above, the standard
indicates that in such situations, an entity must first apply the other standards if those
standards address separation and/or measurement. [IFRS 15.7].
Revenue
2171
For example, some standards require certain components, such as financial liabilities,
to be accounted for at fair value. As a result, when a revenue contract includes that type
of component, the fair value of that component must be separated from the total
transaction price. The remaining transaction price is then allocated to the remaining
performance obligations. The following example illustra
tes this concept.
Example 28.57: Arrangements with components outside the scope of the standard
Retailer sells products to customers and often bundles them with prepaid gift cards when the customer buys
multiple units of its products. Its prepaid gift cards are non-refundable, non-redeemable and non-
exchangeable for cash and do not have an expiry date or back-end fees. That is, any remaining balance on the
prepaid gift cards does not reduce, unless it is spent by the customer. Customers can redeem prepaid gift cards
only at third-party merchants specified by Retailer (i.e. the prepaid gift card cannot be redeemed at the
Retailer) in exchange for goods or services up to a specified monetary amount. When a customer uses the
prepaid gift cards at a merchant(s) to purchase goods or services, Retailer delivers cash to the merchant(s).
Customer X enters into a contract to purchase 100 units of a product and a prepaid gift card for total consideration
of €1,000. Because it bought 100 units, Retailer gives Customer X a discount on the bundle. The stand-alone
selling price of the product and the fair value of the prepaid gift card are €950 and €200, respectively.
Analysis
Retailer determines that it has a contractual obligation to deliver cash to specified merchants on behalf of the
prepaid gift card owner (Customer X) and that this obligation is conditional upon Customer X using the prepaid
gift card to purchase goods or services. Also, Retailer does not have an unconditional right to avoid delivering
cash to settle this contractual obligation. Therefore, Retailer concludes that the liability for this prepaid gift card
meets the definition of a financial liability and applies the requirements in IFRS 9 to account for it.
In accordance with paragraph 7 of IFRS 15, because IFRS 9 provides measurement requirements for initial
recognition (i.e. requires that financial liabilities within its scope be initially recognised at fair value), Entity A
excludes from the IFRS 15 transaction price the fair value of the gift card. Entity A allocates the remaining transaction price to the products purchased. The allocation of the total transaction price is, as follows:
Arrangement
Selling price and
% Allocated
Allocated
consideration
fair value
discount
discount
allocation
Products
€950
100%
€150
€800
(100 units)
Gift card
€200
0%
–
€200
€1,150
€150
€1,000
For components that must be recognised at fair value at inception, any subsequent
remeasurement would be pursuant to other IFRSs (e.g. IFRS 9). That is, subsequent
adjustments to the fair value of those components have no effect on the amount of the
transaction price previously allocated to any performance obligations included within
the contract or on revenue recognised.
8
IFRS 15 – SATISFACTION OF PERFORMANCE OBLIGATIONS
Under IFRS 15, an entity only recognises revenue when it satisfies an identified
performance obligation by transferring a promised good or service to a customer. A good
or service is considered to be transferred when the customer obtains control. [IFRS 15.31].
IFRS 15 states that ‘control of an asset refers to the ability to direct the use of and obtain
substantially all of the remaining benefits from the asset’. Control also means the ability
2172 Chapter 28
to prevent others from directing the use of, and receiving the benefit from, a good or
service. [IFRS 15.33]. The Board noted that both goods and services are assets that a
customer acquires (even if many services are not recognised as an asset because those
services are simultaneously received and consumed by the customer). [IFRS 15.BC118]. The
IASB explained the key terms in the definition of control in the Basis for Conclusions,
which are as follows. [IFRS 15.BC120].
• Ability – a customer must have the present right to direct the use of, and obtain
substantially all of the remaining benefits from, an asset for an entity to recognise
revenue. For example, in a contract that requires a manufacturer to produce an
asset for a customer, it might be clear that the customer will ultimately have the
right to direct the use of, and obtain substantially all of the remaining benefits from,
the asset. However, the entity should not recognise revenue until the customer has
actually obtained that right (which, depending on the contract, may occur during
production or afterwards);
• Direct the use of – a customer’s ability to direct the use of an asset refers to the
customer’s right to deploy or to allow another entity to deploy that asset in its
activities or to restrict another entity from deploying that asset;
• Obtain the benefits from – the customer must have the ability to obtain
substantially all of the remaining benefits from an asset for the customer to obtain
control of it. Conceptually, the benefits from a good or service are potential cash
flows (either an increase in cash inflows or a decrease in cash outflows). A customer
can obtain the benefits directly or indirectly in many ways, such as: using the asset
to produce goods or services (including public services); using the asset to enhance
the value of other assets; using the asset to settle a liability or reduce an expense;
selling or exchanging the asset; pledging the asset to secure a loan; or holding the
asset. [IFRS 15.33].
Under IFRS 15, the transfer of control to the customer represents the transfer of the
rights with regard to the good or service. The customer’s ability to receive the benefit
from the good or service is represented by its right to substantially all of the cash inflows,
or the reduction of the cash outflows, generated by the goods or services. [IFRS 15.33].
Upon transfer of control, the customer has sole possession of the right to use the good
or service for the remainder of its economic life or to consume the good or service in
its own operations.
The IASB explained in the Basis for Conclusions that control should be assessed
primarily from the customer’s perspective. While a seller often surrenders control at the
same time the customer obtains control, the Board required the assessment of control
to be from the customer’s perspective to minimise the risk of an entity recognising
revenue from activities that do not coincide with the transfer of goods or services to the
customer. [IFRS 15.BC121].
The standard indicates that an entity must determine, at contract inception, whether it
will transfer control of a promised good or service over time. If an entity does not satisfy
a performance obligation over time, the performance obligation is satisfied at a point in
time. [IFRS 15.32]. These concepts are explored further below.
Revenue
2173
8.1
Performance obligations satisfied over time
Frequently, entities transfer the promised goods or services to the customer over time. While
the determination of whether goods or services are transferred over time is straightforward
in some contracts (e.g. many service contracts), it is mor
e difficult in other contracts.
To help entities determine whether control transfers over time (rather than at a point in
time), the standard states that an entity transfers control of a good or service over time
(and, therefore, satisfies a performance obligation and recognises revenue over time) if
one of the following criteria is met: [IFRS 15.35]
(a) the customer simultaneously receives and consumes the benefits provided by the
entity’s performance as the entity performs (see 8.1.2 below);
(b) the entity’s performance creates or enhances an asset (e.g. work in progress) that
the customer controls as the asset is created or enhanced (see 8.1.3 below); or
(c) 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 (see 8.1.4 below).
Examples of each of the criteria above are included below. If an entity is unable to
demonstrate that control transfers over time, the presumption is that control transfers
at a point in time (see 8.3 below). [IFRS 15.32].
Figure 28.14 illustrates how to evaluate whether control transfers over time:
Figure 28.14:
Evaluating whether control transfers over time
Does the customer simultaneously
receive and consume the benefits
Yes
provided by the entity’s
performance as the entity
performs?
No
Does the entity’s performance
The entity transfers control
create or enhance an asset that the Yes
of a good or service over time
customer controls as the asset is
created or enhanced?
(and recognises revenue over time).
No
Does the entity’s performance
create an asset with no alternative
use to the entity AND the entity
Yes
has enforceable right to payment
for performance completed to
date?
No
The entity transfers control of a
good or service at a point in time
(and recognises revenue at a point in time).
For each performance obligation identified in the contract, an entity is required to consider
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 431