remaining benefits from the asset.
However, in the case of perishable products, an entity’s conditional right to remove and
replace expired goods does not necessarily constrain the customer’s ability to direct the
use of and obtain substantially all of the remaining benefits from the products. That is,
the entity is not able to remove and replace the products until they expire. Furthermore,
the customer has control of the products over their entire useful life. Consequently, we
believe it may be reasonable for an entity to conclude that control of the initial product
2212 Chapter 28
does transfer to the customer in this situation and that an entity could consider this right
to be a form of a right of return (see 6.4 above).
8.4.2
Put option held by the customer
IFRS 15 indicates that if the customer has the ability to require an entity to repurchase
an asset (i.e. a put option) at a price lower than its original selling price, the entity
considers, at contract inception, whether the customer has a significant economic
incentive to exercise that right. [IFRS 15.B70]. That is, this determination influences
whether the customer truly has control over the asset received.
The determination of whether an entity has a significant economic incentive to exercise
its right determines whether the arrangement is treated as a lease or a sale with the right
of return (discussed at 6.4 above). However, the new standard does not provide any
guidance on determining whether ‘a significant economic incentive’ exists and
judgement may be required to make this determination. An entity must consider all
relevant facts and circumstances to determine whether a customer has a significant
economic incentive to exercise its right, including the relationship between the
repurchase price to the expected market value (taking into consideration the effects of
the time value of money) of the asset at the date of repurchase and the amount of time
until the right expires. The standard notes that if the repurchase price is expected to
significantly exceed the market value of the asset the customer may have a significant
economic incentive to exercise the put option. [IFRS 15.B70-B71, B75].
• If a customer has a significant economic incentive to exercise its right, the
customer is expected to ultimately return the asset. The entity accounts for the
agreement as a lease because the customer is effectively paying the entity for the
right to use the asset for a period of time. [IFRS 15.B70]. However, one exception to
this would be if the contract is part of a sale and leaseback, in which case the
contract would be accounted for as a financing arrangement (financing
arrangements are discussed at 8.4.1 above). [IFRS 15.B73]. Note that IFRS 16
consequentially amended paragraph B70 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.
• If a customer does not have a significant economic incentive to exercise its right, the
entity accounts for the agreement in a manner similar to a sale of a product with a
right of return. [IFRS 15.B72]. The repurchase price of an asset that is equal to or greater
than the original selling price, but less than or equal to the expected market value of
the asset, must also be accounted for as a sale of a product with a right of return, if
the customer does not have a significant economic incentive to exercise its right.
[IFRS 15.B74]. See 6.4 above for a discussion on sales with a right of return.
If the customer has the ability to require an entity to repurchase the asset at a price
equal to, or more than, the original selling price and the repurchase price is more than
the expected market value of the asset, the contract is in effect a financing arrangement.
If the option lapses unexercised, an entity derecognises the liability and recognises
revenue. [IFRS 15.B76].
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2213
The following figure depicts this application guidance.
Figure 28.16:
Put options held by the customer
No
Sale with a right of
Original
→
return
Repurchase
Significant economic incentive to
<
selling
→
price
exercise?
price
Yes
Lease
→
Original
Repurchase
Repurchase
Expected market
≥
selling
and
>
= Financing
price
price
value of asset
price
No
Expected
Original
significant
Sale with
Repurchase
Repurchase
market
≥
selling
and
≤
and
economic
=
a right of
price
price
value of
price
incentive to
return
asset
exercise
IFRS 15 provides application guidance in respect of written put options where there was
limited guidance under legacy IFRS. However, IFRS 15 does not provide any guidance
on determining whether ‘a significant economic incentive’ exists and judgement may be
required to make this determination.
The standard provides the following example of a put option. [IFRS 15.IE315, IE319-IE321].
Example 28.69: Repurchase agreements (put option)
An entity enters into a contract with a customer for the sale of a tangible asset on 1 January 20X7 for
CU1 million.
Case B – Put option: lease
Instead of having a call option, the contract includes a put option that obliges the entity to repurchase the
asset at the customer’s request for CU900,000 on or before 31 December 20X7. The market value is expected
to be CU750,000 on 31 December 20X7.
At the inception of the contract, the entity assesses whether the customer has a significant economic incentive
to exercise the put option, to determine the accounting for the transfer of the asset (see paragraphs B70-B76
of IFRS 15). The entity concludes that the customer has a significant economic incentive to exercise the put
option because the repurchase price significantly exceeds the expected market value of the asset at the date
of repurchase. The entity determines there are no other relevant factors to consider when assessing whether
the customer has a significant economic incentive to exercise the put option. Consequently, the entity
concludes that control of the asset does not transfer to the customer, because the customer is limited in its
ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.
In accordance with paragraphs B70-B71 of IFRS 15, the entity accounts for the transaction as a lease in
accordance with IFRS 16 (or IAS 17).
8.4.3
Sale
s with residual value guarantees
An entity that sells equipment may use a sales incentive programme under which it
guarantees that the customer will receive a minimum resale amount when it disposes of
the equipment (i.e. a residual value guarantee). If the customer holds a put option and
2214 Chapter 28
has a significant economic incentive to exercise, the customer is effectively restricted
in its ability to consume, modify or sell the asset. In contrast, when the entity guarantees
that the customer will receive a minimum amount of sales proceeds, the customer is not
constrained in its ability to direct the use of, and obtain substantially all of the benefits
from, the asset. Accordingly, the Board decided that it was not necessary to expand the
application guidance on repurchase agreements to consider guaranteed amounts of
resale. [IFRS 15.BC427].
Therefore, it is important for an entity to review all its contracts and make sure that the
residual value guarantee is not accomplished through a repurchase provision, such as a
put within the contract (e.g. the customer has the right to require the entity to repurchase
equipment two years after the date of purchase at 85% of the original purchase price). If a
put option is present, the entity would have to use the application guidance in the standard
discussed in 8.4.2 above to determine whether the existence of the put option precludes
the customer from obtaining control of the acquired item. In such circumstances, the
entity would determine whether the customer has a significant economic incentive to
exercise the put. If the entity concludes that there is no significant economic incentive,
the transaction would be accounted for as a sale with a right of return. Alternatively, if the
entity concludes there is a significant economic incentive for the customer to exercise its
right, the transaction would be accounted for as a lease.
However, assume the transaction includes a residual value guarantee in which no put
option is present. If the entity guarantees that it will compensate the customer (or ‘make
whole’) on a qualifying future sale if the customer receives less than 85% of the initial
sale price, the application guidance on repurchase agreements in IFRS 15 would not
apply. That is because the entity is not repurchasing the asset.
In such situations, judgement is needed to determine the appropriate accounting
treatment, which will depend on the specific facts and circumstances. In some cases, an
entity may need to consider the requirements of other IFRSs to appropriately account
for the residual value guarantee. In other situations, IFRS 15 may apply to the entire
transaction. If IFRS 15 applies, an entity would need to assess whether the guarantee
affects control of the asset transferring, which will depend on the promise to the
customer. In some cases, it may not affect the transfer of control. In the Basis for
Conclusions, the Board noted that ‘when the entity guarantees that the customer will
receive a minimum amount of sales proceeds, the customer is not constrained in its
ability to direct the use of, and obtain substantially all of the benefits from, the asset.’
[IFRS 15.BC431]. However, while a residual value guarantee may not affect the transfer of
control, an entity would need to consider whether it affects the transaction price (see 6
above). While the economics of a repurchase agreement and a residual value guarantee
may be similar, the accounting could be quite different.
8.5 Consignment
arrangements
Entities frequently deliver inventory on a consignment basis to other parties
(e.g. distributor, dealer). A consignment sale is one in which physical delivery of a
product to a counterparty has occurred, but the counterparty is not required to pay until
the product is either resold to an end customer or used by the counterparty. Under such
arrangements, the seller (or consignor) retains the legal title to the merchandise and the
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2215
counterparty (or consignee) acts as a selling agent. The consignee earns a commission
on the products that have been sold and periodically remits the cash from those sales,
net of the commission it has earned, to the consignor. In addition, consigned products
that are not sold or used generally can be returned to the consignor. By shipping on a
consignment basis, consignors are able to better market products by moving them closer
to the end-customer. However, they do so without selling the goods to the intermediary
(consignee). [IFRS 15.B77].
The Board included indicators that an arrangement is a consignment arrangement
include, but are not limited to, the following: [IFRS 15.B78]
‘(a) the product is controlled by the entity until a specified event occurs, such as the
sale of the product to a customer of the dealer or until a specified period expires;
(b) the entity is able to require the return of the product or transfer the product to a
third party (such as another dealer); and
(c) the dealer does not have an unconditional obligation to pay for the product
(although it might be required to pay a deposit).’
Entities entering into a consignment arrangement need to determine the nature of the
performance obligation (i.e. whether the obligation is to transfer the product to the
consignee or to transfer the product to the end-customer). This determination would
be based on whether control of the product passes to the consignee. Typically, a
consignor does not relinquish control of the consigned product until the product is sold
to the end-customer or, in some cases, when a specified period expires. Consignees
commonly do not have any obligation to pay for the product, other than to pay the
consignor the agreed-upon portion of the sale price once the consignee sells the product
to a third party. As a result, for consignment arrangements, revenue generally would not
be recognised when the products are delivered to the consignee because control has
not transferred (i.e. the performance obligation to deliver goods to the end-customer
has not yet been satisfied). [IFRS 15.B77].
While some transactions are clearly identified as consignment arrangements, there are
other, less transparent transactions, in which the seller has retained control of the goods,
despite no longer having physical possession. Such arrangements may include the
shipment of products to distributors that are not required (either explicitly or implicitly),
or do not have the wherewithal, to pay for the product until it is sold to the end-
customer. Judgement is necessary in assessing whether the substance of a transaction is
a consignment arrangement. The identification of such arrangements often requires a
careful analysis of the facts and circumstances of the transaction, as well as an
understanding of the rights and obligations of the parties and the seller’s customary
business practices in such arrangements. While not required by IFRS 15 or IAS 2, we
would encourage entities to separately disclose the amount of their consigned
inventory, if material.
8.6 Bill-and-hold
arrangements
In some sales transactions, the selling entity fulfils its obligations and bills the customer
for the work performed, but d
oes not ship the goods until a later date. These
transactions, often called bill-and-hold transactions, are usually designed this way at the
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request of the purchaser for a number of reasons, including a lack of storage capacity or
its inability to use the goods until a later date. Whereas in a consignment sale (discussed
in 8.5 above), physical delivery has occurred, but control of the goods has not
transferred to the customer, the opposite may be true in a bill-and-hold transaction. For
example, a customer may request an entity to enter into such a contract because of the
customer’s lack of available space for the product or because of delays in the customer’s
production schedules. [IFRS 15.B79].
The criteria for determining whether a bill-and-hold transaction qualifies for revenue
recognition under the standard are similar to legacy IFRS. [IAS 18.IE1]. However,
consideration of a separate custodial performance obligation (as discussed in the
following application guidance) may be new to IFRS preparers, as this was not addressed
in IAS 18.
An entity determines when it has satisfied its performance obligation to transfer a
product by evaluating when a customer obtains control of that product. For some
contracts, control transfers either when the product is delivered to the customer’s site
or when the product is shipped, depending on the terms of the contract (including
delivery and shipping terms). However, for some contracts, a customer may obtain
control of a product even though that product remains in an entity’s physical possession.
In that case, the customer has the ability to direct the use of, and obtain substantially all
of the remaining benefits from, the product even though it has decided not to exercise
its right to take physical possession of that product. Consequently, the entity does not
control the product. Instead, the entity provides custodial services to the customer over
the customer’s asset. [IFRS 15.B80].
In addition to applying the general requirements for assessing whether control has
transferred, for a customer to have obtained control of a product in a bill-and-hold
arrangement, all of the following criteria must be met: [IFRS 15.B81]
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 440