at contract inception whether it satisfies the performance obligation over time (i.e. whether
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it meets one of the three criteria for over time recognition) or at a point in time. This
evaluation requires entities to perform analyses that might differ from what they did under
legacy IFRS. For example, entities that enter in to contracts to construct real estate for a
customer no longer need to determine whether the contract either meets the definition of
a construction contract (in order to apply IAS 11) or is for the provision of services (under
IAS 18) so as to recognise revenue over time. Instead, under IFRS 15, an entity needs to
determine whether its performance obligation is satisfied over time by evaluating the three
criteria for over time recognition. If an entity does not satisfy a performance obligation
over time, the performance obligation is satisfied at a point in time.
8.1.1
Changing from point in time under legacy standards to recognising
revenue over time under IFRS 15
In November 2016, members of the FASB TRG were asked to consider whether an
entity that recognises revenue at a point in time under current standards could be
required to recognise revenue over time under the new standard.98
The FASB TRG members generally agreed that an entity that recognised revenue at a
point in time under legacy revenue standards needs to analyse each of its contracts to
determine whether it is required to recognise revenue over time under the standard.
That is, an entity that recognised revenue at a point in time under legacy standards
should not presume it recognises revenue at a point in time under IFRS 15 and should
assess the facts and circumstances of each of its contracts based on the requirements of
IFRS 15. An entity recognises revenue at a point in time if it does not meet the over-
time criteria in the standard.99
An example of a transaction in which an entity might have a change in recognition
timing is a contract manufacturer that produces goods designed to a customer’s unique
specifications and can reasonably conclude that the goods do not have an alternative
use. If the manufacturer also has an enforceable right to payment for performance
completed to date, it would meet the standard’s third criterion to recognise revenue
over time, even though it might have recognised revenue at a point in time under legacy
IFRS (e.g. based on the number of units produced or units delivered).
However, a reassessment of the timing and pattern of revenue recognition is not limited to
contracts that were recognised at a point in time under legacy standards. Entities have to
analyse each of their contracts to determine the appropriate timing and pattern of
recognition, considering the specific criteria and requirements of the new standard. In some
instances, this could result in a change in the timing and/or pattern of revenue recognition.
8.1.2
Customer simultaneously receives and consumes benefits as the
entity performs
As the Board explained in the Basis for Conclusions, in many service contracts the
entity’s performance creates an asset, momentarily, because that asset is simultaneously
received and consumed by the customer. In these cases, the customer obtains control
of the entity’s output as the entity performs. Therefore, the performance obligation is
satisfied over time. [IFRS 15.BC125]. While this criterion most often applies to service
contracts, the TRG discussed instances in which commodity contracts (e.g. electricity,
natural gas, heating oil) could be recognised over time. These situations could arise if
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the facts and circumstances of the contract indicate that the customer will
simultaneously receive and consume the benefits (e.g. a continuous supply contract to
meet immediate demands).100 Refer to 8.1.2.A below for further information.
There may be contracts in which it is unclear whether the customer simultaneously
receives and consumes the benefit of the entity’s performance over time. IFRS 15 states
that, for some types of performance obligations, the assessment of whether a customer
receives the benefits of an entity’s performance as the entity performs and
simultaneously consumes those benefits as they are received will be straightforward.
Examples given by the standard include routine or recurring services (e.g. a cleaning
service) in which the receipt and simultaneous consumption by the customer of the
benefits of the entity’s performance can be readily identified. [IFRS 15.B3].
For other types of performance obligations, an entity may not be able to readily identify
whether a customer simultaneously receives and consumes the benefits from the
entity’s performance as the entity performs. In those circumstances, IFRS 15 states that
‘a performance obligation is satisfied over time if an entity determines that another
entity would not need to substantially re-perform the work that the entity has
completed to date if that other entity were to fulfil the remaining performance
obligation to the customer’. [IFRS 15.B4].
In determining whether another entity would not need to substantially re-perform the
work the entity has completed to date, the standard requires an entity to make both of
the following assumptions: [IFRS 15.B4]
• disregard potential contractual restrictions or practical limitations that otherwise
would prevent the entity from transferring the remaining performance obligation
to another entity; and
• presume that another entity fulfilling the remainder of the performance obligation
would not have the benefit of any asset that is presently controlled by the entity
(and that would remain controlled by the entity if the performance obligation were
to transfer to another entity).
The IASB added this application guidance because the notion of ‘benefit’ can be
subjective. As discussed in the Basis for Conclusions, the Board provided an example of
a freight logistics contract. Assume that the entity has agreed to transport goods from
Vancouver to New York City. Some stakeholders had suggested that the customer
receives no benefit from the entity’s performance until the goods are delivered to, in
this case, New York City. However, the Board said that the customer benefits as the
entity performs. This is because, if the goods were only delivered part of the way (e.g. to
Chicago), another entity would not need to substantially re-perform the entity’s
performance to date. The Board observed that in these cases, the assessment of whether
another entity would need to substantially re-perform the entity’s performance to date
is an objective way to assess whether the customer receives benefit from the entity’s
performance as it occurs. [IFRS 15.BC126].
In assessing whether a customer simultaneously receives and consumes the benefits
provided by an entity’s performance, all relevant facts and circumstances need to be
considered. This includes considering the inherent characteristics of the good or
service, the contract terms and information about how the good or service is transferred
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or delivered. However, as noted in paragraph B4(a) of IFRS 15 (the first bullet above), an
entity disregards any contractual or practical restrictions when it assesses this criterion.
In the Basis for Conclusions, the IASB explained that the assessment of whether control
of the goods or services has transferred to the customer is performed by making a
hypothetical assessment of what another entity would need to do if it were to take over
the remaining performance. Therefore, actual practical or contractual restrictions
would have no bearing on the assessment of whether the entity had already transferred
control of the goods or services provided to date. [IFRS 15.BC127].
The standard provides the following example that illustrates a customer simultaneously
receiving and consuming the benefits as the entity performs in relation to a series of
distinct payroll processing services. [IFRS 15.IE67-IE68].
Example 28.58: Customer simultaneously receives and consumes the benefits
An entity enters into a contract to provide monthly payroll processing services to a customer for one year.
The promised payroll processing services are accounted for as a single performance obligation in
accordance with paragraph 22(b) of IFRS 15. The performance obligation is satisfied over time in
accordance with paragraph 35(a) of IFRS 15 because the customer simultaneously receives and consumes
the benefits of the entity’s performance in processing each payroll transaction as and when each transaction
is processed. The fact that another entity would not need to re-perform payroll processing services for the
service that the entity has provided to date also demonstrates that the customer simultaneously receives
and consumes the benefits of the entity’s performance as the entity performs. (The entity disregards any
practical limitations on transferring the remaining performance obligation, including setup activities that
would need to be undertaken by another entity.) The entity recognises revenue over time by measuring its
progress towards complete satisfaction of that performance obligation in accordance with
paragraphs 39-45 and B14-B19 of IFRS 15.
The IASB clarified, in the Basis for Conclusions, that an entity does not evaluate this
criterion (to determine whether a performance obligation is satisfied over time) if the
entity’s performance creates an asset that the customer does not consume immediately
as the asset is received. Instead, an entity assesses that performance obligation using the
criteria discussed at 8.1.3 and 8.1.4 below.
For some service contracts, the entity’s performance will not satisfy its obligation over
time because the customer does not consume the benefit of the entity’s performance
until the entity’s performance is complete. The standard provides an example
(Example 14 of IFRS 15, included as Example 28.60 at 8.1.4.B below) of an entity
providing consulting services that will take the form of a professional opinion upon
the completion of the services. In this situation, an entity cannot conclude that the
services are transferred over time based on this criterion. Instead, the entity must
consider the remaining two criteria in paragraph 35 of IFRS 15 (see 8.1.3 and 8.1.4 and
Example 28.60 below).
8.1.2.A
Evaluating whether a customer simultaneously receives and consumes
the benefits of a commodity as the entity performs
In July 2015, the TRG members discussed the factors that an entity should consider
when evaluating whether a customer simultaneously receives and consumes the
benefits of a commodity (e.g. electricity, natural gas, heating oil) as the entity performs.101
The TRG members generally agreed that an entity would consider all known facts and
circumstances when evaluating whether a customer simultaneously receives and
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consumes the benefits of a commodity. These may include the inherent characteristics
of the commodity (e.g. whether the commodity can be stored), contract terms (e.g. a
continuous supply contract to meet immediate demands) and information about
infrastructure or other delivery mechanisms.
As such, revenue related to the sale of a commodity may or may not be recognised over
time, depending on whether the facts and circumstances of the contract indicate that
the customer simultaneously receives and consumes the benefits. This evaluation may
require the use of significant judgement.
Whether a commodity meets this criterion and is transferred over time is important in
determining whether the sale of a commodity meets the criteria to apply the series
requirement (see 5.2.2 above). This, in turn, affects how an entity allocates variable
consideration and apply the requirements for contract modifications and changes in the
transaction price.
8.1.3
Customer controls the asset as it is created or enhanced
The second criterion to determine whether control of a good or service is transferred
over time requires entities to evaluate whether the customer controls the asset as it is
being created or enhanced. An entity applies the requirements for control in
paragraphs 31-34 and 38 of IFRS 15. [IFRS 15.B5].
For the purpose of this determination, the definition of ‘control’ is the same as
previously discussed (i.e. the ability to direct the use of and obtain substantially all
of the remaining benefits from the asset). The IASB explained in the Basis for
Conclusions that this criterion addresses situations in which the customer controls
any work in progress arising from the entity’s performance. [IFRS 15.BC129]. The Board
provided an example in which the entity has entered into a construction contract to
build on the customer’s land, stating that any work in progress arising from the
entity’s performance is generally controlled by the customer. [IFRS 15.BC129]. The
IFRS Interpretations Committee also reiterated the overall intent of the criterion
and referred to this example from the Basis for Conclusions during its March 2018
meeting.102 In addition, some construction contracts may also contain clauses
indicating that the customer owns any work in progress as the contracted item is
being built. Furthermore, the asset being created or enhanced can be either tangible
or intangible. [IFRS 15.B5].
The Board observed in the Basis for Conclusions that the second over-time criterion
(related to the customer’s control of the asset as it is being created or enhanced) is
consistent with the rationale for the percentage-of-completion revenue recognition
approach for construction contracts under legacy US GAAP. [IFRS 15.BC130]. Both
approaches acknowledge that, in effect, the entity has agreed to sell its rights to the asset
(i.e. work in progress) as the entity performs (i.e. a continuous sale).
8.1.4
Asset with no alternative use and right to payment
In some cases, it may be unclear whether the asset that an entity creates or enhances is
controlled by the customer when considering the first two criteria (discussed at 8.1.2
and 8.1.3 above) for evaluating whether control transfers over time. Therefore, the
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Board added a third criterion, which requires revenue to be recognised over time if both
of the following two requirements are met: [IFRS 15.35(c)]
• the entity’s performance does not create an asset with a
lternative use to the entity
(see 8.1.4.A below); and
• the entity has an enforceable right to payment for performance completed to date
(see 8.1.4.B below).
8.1.4.A Alternative
use
The IASB explained in the Basis for Conclusions that it had developed the notion of
‘alternative use’ to prevent over time revenue recognition when the entity’s
performance does not transfer control of the goods or services to the customer over
time. When the entity’s performance creates an asset with an alternative use to the
entity (e.g. standard inventory items), the entity can readily direct the asset to another
customer. In those cases, the entity (not the customer) controls the asset as it is created
because the customer does not have the ability to direct the use of the asset or restrict
the entity from directing that asset to another customer. The standard states that an
asset created by an entity’s performance ‘does not have an alternative use to an entity if
the entity is either restricted contractually from readily directing the asset for another
use during the creation or enhancement of that asset or limited practically from readily
directing the asset in its completed state for another use’. The assessment of whether an
asset has an alternative use to the entity is made at contract inception. [IFRS 15.36].
In assessing whether an asset has an alternative use, an entity is required to consider the
effects of contractual restrictions and practical limitations on its ability to readily direct
that asset for another use (e.g. selling it to a different customer). The standard clarifies
that the possibility of the contract with the customer being terminated is not a relevant
consideration in this assessment. [IFRS 15.B6].
In making the assessment of whether a good or service has an alternative use, an entity
must consider any substantive contractual restrictions. A contractual restriction is
substantive if a customer could enforce its rights to the promised asset if the entity
sought to direct the asset for another use. [IFRS 15.B7]. Contractual restrictions that are
not substantive, such as protective rights for the customer, are not considered. The
Board explained in the Basis for Conclusions that a protective right typically gives an
entity the practical ability to physically substitute or redirect the asset without the
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