of the latter types of acceptance clauses.
Acceptance criteria that an entity cannot objectively evaluate against the agreed-
upon specifications in the contract preclude an entity from concluding that a
customer has obtained control of a good or service until formal customer sign-off is
obtained or the acceptance provisions lapse. However, the entity would consider its
experience with other contracts for similar goods or services because that
experience may provide evidence about whether the entity is able to objectively
determine that a good or service provided to the customer is in accordance with the
agreed-upon specifications in the contract. We believe one or more of the following
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would represent circumstances in which the entity may not be able to objectively
evaluate the acceptance criteria.
• The acceptance provisions are unusual or ‘non-standard’. Indicators of ‘non-
standard’ acceptance terms are:
• the duration of the acceptance period is longer than in contracts for similar
goods or services;
• the majority of the entity’s contracts lack similar acceptance terms; and
• the contract contains explicit customer-specified requirements that must be
met prior to acceptance.
• The contract contains a requirement for explicit notification of acceptance (not just
deemed acceptance). Explicit notification requirements may indicate that the criteria
with which the customer is assessing compliance are not objective. In addition, such
explicit notification clauses may limit the time period within which the customer can
reject transferred products and may require the customer to provide, in writing, the
reasons for the rejection of the products by the end of a specified period. When such
clauses exist, acceptance can be deemed to have occurred at the end of the specified
time period if notification of rejection has not been received from the customer, as
long as the customer has not indicated it will reject the products.
In determining whether compliance with the criteria for acceptance can be objectively
assessed (and acceptance is only a formality), the following should be considered:
• whether the acceptance terms are standard in arrangements entered into by the
entity; and
• whether the acceptance is based on the transferred product performing to
standard, published, specifications and whether the entity can demonstrate that it
has an established history of objectively determining that the product functions in
accordance with those specifications.
As discussed above, customer acceptance should not be deemed a formality if the
acceptance terms are unusual or non-standard. If a contract contains acceptance
provisions that are based on customer-specified criteria, it may be difficult for the entity
to objectively assess compliance with the criteria and the entity may not be able to
recognise revenue prior to obtaining evidence of customer acceptance. However,
determining that the acceptance criteria have been met (and, therefore, acceptance is
merely a formality) may be appropriate if the entity can demonstrate that its product
meets all of the customer’s acceptance specifications by replicating, before shipment,
those conditions under which the customer intends to use the product.
If it is reasonable to expect that the product’s performance (once it has been installed
and is operating at the customer’s facility) will be different from the performance when
it was tested prior to shipment, this acceptance provision will not have been met. The
entity, therefore, would not be able to conclude that the customer has obtained control
until customer acceptance occurs. Factors indicating that specifications cannot be
tested effectively prior to shipment include:
• the customer has unique equipment, software or environmental conditions that
can reasonably be expected to make performance in that customer’s environment
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different from testing performed by the entity. If the contract includes customer
acceptance criteria or specifications that cannot be effectively tested before
delivery or installation at the customer’s site, revenue recognition would be
deferred until it can be demonstrated that the criteria are met;
• the products that are transferred are highly complex; and
• the entity has a limited history of testing products prior to control transferring to
the customer or a limited history of having customers accept products that it has
previously tested.
Determining when a customer obtains control of an asset in a contract with customer-
specified acceptance criteria requires the use of professional judgement and depends
on the weight of the evidence in the particular circumstances. The conclusion could
change based on an analysis of an individual factor, such as the complexity of the
equipment, the nature of the interface with the customer’s environment, the extent of
the entity’s experience with this type of transaction or a particular clause in the
agreement. An entity may need to discuss the situation with knowledgeable project
managers or engineers in making such an assessment.
In addition, each contract containing customer-specified acceptance criteria may
require a separate compliance assessment of whether the acceptance provisions have
been met prior to confirmation of the customer’s acceptance. That is, since different
customers may specify different acceptance criteria, an entity may not be able to make
one compliance assessment that applies to all contracts because of the variations in
contractual terms and customer environments.
Even if a contract includes a standard acceptance clause, if the clause relates to a new
product or one that has only been sold on a limited basis previously, an entity may be
required to initially defer revenue recognition for the product until it establishes a
history of successfully obtaining acceptance.
Paragraph B86 of IFRS 15 states that, if an entity delivers products to a customer for
trial or evaluation purposes and the customer is not committed to pay any
consideration until the trial period lapses, control of the product is not transferred to
the customer until either the customer accepts the product or the trial period lapses.
See further discussion of ‘free’ trial periods in 4.1.1.B above, including when such
arrangements may meet the criteria to be considered a contract within the scope of
the model in IFRS 15.
8.4 Repurchase
agreements
Some agreements include repurchase provisions, either as part of a sales contract
or as a separate contract that relates to the goods in the original agreement or
similar goods. These provisions affect how an entity applies the requirements on
control to affected transactions. That is, when evaluating whether a customer
obtains control of an asset, an entity shall consider any agreement to repurchase
the asset. [IFRS 15.34].
The standard clarifies the types of arrangements that qualify as repurchase
agreements. It defines a repurchase agreement as ‘a contract in which an entity sells
an asset and also promises or has the opti
on (either in the same contract or in
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another contract) to repurchase the asset. The repurchased asset may be the asset
that was originally sold to the customer, an asset that is substantially the same as that
asset, or another asset of which the asset that was originally sold is a component’.
[IFRS 15.B64].
The standard states that repurchase agreements generally come in three forms:
[IFRS 15.B65]
• an entity’s obligation to repurchase the asset (a forward);
• an entity’s right to repurchase the asset (a call option); and
• an entity’s obligation to repurchase the asset at the customer’s request (a put option).
In order for an obligation or right to purchase an asset to be accounted for as a
repurchase agreement under IFRS 15, it needs to exist at contract inception, either
as a part of the same contract or in another contract. The IASB clarified that an
entity’s subsequent decision to repurchase an asset (after transferring control of that
asset to a customer) without reference to any pre-existing contractual right, would
not be accounted for as a repurchase agreement under the standard. That is, the
customer is not obligated to resell that good to the entity as a result of the initial
contract. Therefore, any subsequent decision to repurchase the asset does not affect
the customer’s ability to control the asset upon initial transfer. However, in cases in
which an entity decides to repurchase a good after transferring control of the good
to a customer, the Board observed that the entity should carefully consider whether
the customer obtained control in the initial transaction. Furthermore, it may need
to consider the application guidance on principal versus agent considerations
(see 5.4 above). [IFRS 15.BC423].
8.4.1
Forward or call option held by the entity
When an entity has the obligation or right to repurchase an asset (i.e. a forward or a call
option), the standard indicates that the customer has not obtained control of the asset.
That is, the customer is limited in its ability to direct the use of, and obtain substantially
all of the remaining benefits from, the asset even though the customer may have
physical possession of the asset.
Consequently, the standard requires that an entity account for a transaction
including a forward or a call option based on the relationship between the
repurchase price and the original selling price. The standard indicates that if the
entity has the right or obligation to repurchase the asset at a price less than the
original sales price (taking into consideration the effects of the time value of money),
the entity would account for the transaction as a lease in accordance with IFRS 16
(or IAS 17), unless the contract is part of a sale and leaseback transaction. If the entity
has the right or obligation to repurchase the asset at a price equal to or greater than
the original sales price (considering the effects of the time value of money) or if the
contract is part of a sale and leaseback transaction, the entity would account for the
contract as a financing arrangement in accordance with paragraph B68 of IFRS 15.
[IFRS 15.B66-B67].
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The following figure depicts this application guidance for transactions that are not sale
and leaseback transaction.
Figure 28.15:
Forward or call options
Repurchase price
<
Original selling price
=
Lease
Repurchase price
≥
Original selling price
=
Financing
Under the standard, a transaction in which a seller has an option to repurchase the
product is treated as a lease or a financing arrangement (i.e. not a sale). This is because
the customer does not have control of the product and is constrained in its ability to
direct the use of and obtain substantially all of the remaining benefits from the good.
Entities cannot consider the likelihood that a call option will be exercised in
determining the accounting for the repurchase provision. However, the Board noted in
the Basis for Conclusions that non-substantive call options are ignored and would not
affect when a customer obtains control of an asset. [IFRS 15.BC427]. See also 8.4.1.A below
for an example of a conditional call option that may qualify to be treated as a sale.
In the Basis for Conclusions, the Board also observed that ‘theoretically, a customer is
not constrained in its ability to direct the use of and obtain substantially all of the
benefits from, the asset if an entity agrees to repurchase, at the prevailing market price,
an asset from the customer that is substantially the same and is readily available in the
marketplace.’ [IFRS 15.BC425]. That is, in such a situation, a customer could sell the original
asset (thereby exhibiting control over it) and then re-obtain a similar asset in the market
place prior to the asset being repurchased by the entity.
If a transaction is considered a financing arrangement under the IFRS 15, in accordance
with paragraph B68 of IFRS 15, the selling entity continues to recognise the asset. In
addition, it records a financial liability for the consideration received from the customer.
The difference between the consideration received from the customer and the
consideration subsequently paid to the customer (upon repurchasing the asset)
represents the interest and holding costs (as applicable) that are recognised over the
term of the financing arrangement. If the option lapses unexercised, the entity
derecognises the liability and recognises revenue at that time. [IFRS 15.B68-B69].
Also note that, when effective, IFRS 16 will consequentially amend paragraph B66(a) of
IFRS 15 to specify that, if the contract is part of a sale and leaseback transaction, the
entity continues to recognise the asset. Furthermore, the entity recognises a financial
liability for any consideration received from the customer to which IFRS 9 would apply.
Consistent with the legacy requirements in IAS 18 and in SIC-27 – Evaluating the
Substance of Transactions Involving the Legal Form of a Lease, the standard requires an
entity to consider a repurchase agreement together with the original sales agreement when
they are linked in such a way that the substance of the arrangement cannot be understood
without reference to the series of transactions as a whole. [IAS 18.13, SIC-27]. Therefore, for
most entities, the requirement to consider the two transactions together is not a change.
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The requirement in the standard to distinguish between repurchase agreements that are,
in substance, leases or financing arrangements is broadly consistent with legacy IFRS.
IAS 18 indicated that ‘the terms of the agreement need to be analysed to ascertain
whether, in substance, the seller has transferred the risks and rewards of ownership to
the buyer’. [IAS 18.IE5].
However, IAS 18 did not specify how to treat repurchase agreements that represent
financing arrangements, except to state that such arrangements did not give rise to
revenue. Therefore, the requirements in IFRS 15 may result in a significant change in
&nb
sp; practice for some entities.
Entities may find the requirements challenging to apply in practice as the standard treats all
forwards and call options the same way and does not consider the likelihood that they will
be exercised. In addition, since the standard provides lease requirements, it is be important
for entities to understand the interaction between the lease and revenue standards.
The standard provides the following example of a call option. [IFRS 15.IE315-IE318].
Example 28.68: Repurchase agreements (call option)
An entity enters into a contract with a customer for the sale of a tangible asset on 1 January 20X7 for
$1 million.
Case A – Call option: financing
The contract includes a call option that gives the entity the right to repurchase the asset for $1.1 million on or
before 31 December 20X7.
Control of the asset does not transfer to the customer on 1 January 20X7 because the entity has a right to
repurchase the asset and therefore the customer is limited in its ability to direct the use of, and obtain
substantially all of the remaining benefits from, the asset. Consequently, in accordance with paragraph B66(b)
of IFRS 15, the entity accounts for the transaction as a financing arrangement, because the exercise price is
more than the original selling price. In accordance with paragraph B68 of IFRS 15, the entity does not
derecognise the asset and instead recognises the cash received as a financial liability. The entity also
recognises interest expense for the difference between the exercise price ($1.1 million) and the cash received
($1 million), which increases the liability.
On 31 December 20X7, the option lapses unexercised; therefore, the entity derecognises the liability and
recognises revenue of $1.1 million.
8.4.1.A
Conditional call options to remove and replace expired products (e.g. out-
of-date perishable goods, expired medicine)
The standard does not differentiate between conditional call or forward options held
by the entity and unconditional ones. Furthermore, it states that a customer does not
obtain control of the asset when the entity has a right to repurchase the asset. The
presence of call or forward options indicates that control is not transferred because the
customer is limited in its ability to direct the use of and obtain substantially all of the
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 439