Arrangements partially in IFRS 15 is about that difficult situation of a mixed contract, parts are in IFRS 15 parts are outside IFRS 15. IFRS 15 provides accounting requirements for all revenue arising from contracts with customers. Arrangements partially in IFRS 15
They affect all entities that enter into contracts to provide goods or services to their customers, unless the contracts are in the scope of other IFRSs requirements, such as IFRS 16 the leasing standard. Arrangements partially in IFRS 15
The standard provides requirements for arrangements partially within the scope of IFRS 15 and partially within the scope of other standards, as follows:
Partially in scope – IFRS 15 7
Document your decisions in your financial close file to facilitate internal review and approval and external audits.
Entities enter into transactions that are partially within the scope of IFRS 15 and partially within the scope of other standards.
In these situations, IFRS 15 requires an entity to apply any separation and/or measurement requirements in the other standard first, before applying the requirements in IFRS 15. Some examples of where separation and/or initial measurement are addressed in other IFRS include the following: Arrangements partially in IFRS 15
- IFRS 9 generally requires that a financial instrument be recognised at fair value at initial recognition. For contracts that include the issuance of a financial instrument and revenue components within the scope of IFRS 15 and the financial instrument is required to be initially recognised at fair value, the fair value of the financial instrument is first measured and the remainder of the estimated contract consideration is allocated among the other components in the contract in accordance with IFRS 15. Arrangements partially in IFRS 15
- IFRS 16 12 requires the allocation of an arrangement’s consideration between a lease and other components within a contractual arrangement using a relative fair value approach regarding the lease of the land and the buildings elements in a lease of land and buildings (lease is also rent of land and buildings!!!!). [IFRS 16 B56] Arrangements partially in IFRS 15
Conversely, if a component of the arrangement is covered by another standard or interpretation, but that standard or interpretation does not specify how to separate and/or initially measure that component, the entity needs to apply IFRS 15 to separate and/or initially measure each component.
For example, specific requirements do not exist for the separation and measurement of the different parts of an arrangement when an entity sells a business and also enters into a long-term supply agreement with the other party. Arrangements partially in IFRS 15
The requirements for arrangements partially within the scope of IFRS 15 and partially within the scope of other standards are detailed in IFRS 15 7 (follow the link).
In certain transactions, a counterparty may not always be a ‘customer’ of the entity. Instead, the counterparty may be a collaborator or partner that shares in the risks and benefits of developing a product to be marketed. This is common in the pharmaceutical, bio-technology, oil and gas, and health care industries. Arrangements partially in IFRS 15
However, depending on the facts and circumstances, these arrangements may also contain a vendor-customer relationship component. Such contracts could still be within the scope of IFRS 15, at least partially, if the collaborator or partner meets the definition of a customer for some, or all, aspects of the arrangement.
An entity, a pharmaceutical company, licenses to a customer its patent rights to an approved drug compound for 10 years and also promises to manufacture the drug for the customer. The drug is a mature product; therefore the entity will not undertake any activities to support the drug, which is consistent with its customary business practices. Arrangements partially in IFRS 15
Case A—Licence is not distinct
In this case, no other entity can manufacture this drug because of the highly specialised nature of the manufacturing process. As a result, the licence cannot be purchased separately from the manufacturing services.
The entity assesses the goods and services promised to the customer to determine which goods and services are distinct in accordance with IFRS 15 27. The entity determines that the customer cannot benefit from the licence without the manufacturing service; therefore, the criterion in IFRS 15 27(a) is not met. Arrangements partially in IFRS 15
Consequently, the licence and the manufacturing service are not distinct and the entity accounts for the licence and the manufacturing service as a single performance obligation.
The entity applies IFRS 15 31–38 to determine whether the performance obligation (ie the bundle of the licence and the manufacturing services) is a performance obligation satisfied at a point in time or over time.
Case B—Licence is distinct
In this case, the manufacturing process used to produce the drug is not unique or specialised and several other entities can also manufacture the drug for the customer.
The entity assesses the goods and services promised to the customer to determine which goods and services are distinct, and it concludes that the criteria in IFRS 15 27 are met for each of the licence and the manufacturing service. Arrangements partially in IFRS 15
The entity concludes that the criterion in IFRS 15 27(a) is met because the customer can benefit from the licence together with readily available resources other than the entity’s manufacturing service (because there are other entities that can provide the manufacturing service), and can benefit from the manufacturing service together with the licence transferred to the customer at the start of the contract. Arrangements partially in IFRS 15
The entity also concludes that its promises to grant the licence and to provide the manufacturing service are separately identifiable (ie the criterion in IFRS 15 27(a) is met). The entity concludes that the licence and the manufacturing service are not inputs to a combined item in this contract on the basis of the principle and the factors in IFRS 15 29.
In reaching this conclusion, the entity considers that the customer could separately purchase the licence without significantly affecting its ability to benefit from the licence.
Neither the licence, nor the manufacturing service, is significantly modified or customised by the other and the entity is not providing a significant service of integrating those items into a combined output.
The entity further considers that the licence and the manufacturing service are not highly interdependent or highly interrelated because the entity would be able to fulfil its promise to transfer the licence independently of fulfilling its promise to subsequently manufacture the drug for the customer.
Similarly, the entity would be able to manufacture the drug for the customer even if the customer had previously obtained the licence and initially utilised a different manufacturer. Thus, although the manufacturing service necessarily depends on the licence in this contract (ie the entity would not provide the manufacturing service without the customer having obtained the licence), the licence and the manufacturing service do not significantly affect each other.
Consequently, the entity concludes that its promises to grant the licence and to provide the manufacturing service are distinct and that there are two performance obligations:
- licence of patent rights; and
- manufacturing service.
The entity assesses, in accordance with IFRS 15 B58, the nature of the entity’s promise to grant the licence. The drug is a mature product (ie it has been approved, is currently being manufactured and has been sold commercially for the last several years).
For these types of mature products, the entity’s customary business practices are not to undertake any activities to support the drug. The drug compound has significant stand-alone functionality (ie its ability to produce a drug that treats a disease or condition). Consequently, the customer obtains a substantial portion of the benefits of the drug compound from that functionality, rather than from the entity’s ongoing activities.
The entity concludes that the criteria in IFRS 15 B58 are not met because the contract does not require, and the customer does not reasonably expect, the entity to undertake activities that significantly affect the intellectual property to which the customer has rights. In its assessment of the criteria in IFRS 15 B58, the entity does not take into consideration the separate performance obligation of promising to provide a manufacturing service.
Consequently, the nature of the entity’s promise in transferring the licence is to provide a right to use the entity’s intellectual property in the form and the functionality with which it exists at the point in time that it is granted to the customer. Consequently, the entity accounts for the licence as a performance obligation satisfied at a point in time.
The entity applies IFRS 15 31–38 to determine whether the manufacturing service is a performance obligation satisfied at a point in time or over time.
See also: The IFRS Foundation