Arrangements That Do Not Meet The Definition Of A Contract – FAQ | IFRS

Arrangements that do not meet the definition of a contract

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What happens with arrangements that do not meet the definition of a contract under IFRS 15. How are these accounted for? What IFRSs are used in such a case? If an arrangement does not meet the criteria to be considered a contract under the standard, it must be accounted for as stipulated in IFRS 15 15 – 16 (recognition of the consideration received as revenue if certain events have been met or as a liability until one of these events have been met), using the following decision tree: Arrangements that do not meet the definition of a contract


Arrangements that do not meet the definition of a contract

If the arrangements identifies as a IFRS 15 Contract with customers go to Step 2 – 5

References:

  • Contract qualifying criteria – IFRS 15 9
  • Consideration recognised as an asset – IFRS 15 15
  • Consideration recognised as a liability – IFRS 15 16

Document your decisions in your financial close file to facilitate internal review and approval and external audits.

Entities are required to continue to assess the criteria in IFRS 15 9 throughout the term of the arrangement to determine whether they are subsequently met. Once the criteria are met, the Concise information Concise information Concise information Concise informationmodel in the standard applies, rather than the requirements discussed below. Arrangements that do not meet the definition of a contract

Revenue recognition on a cumulative catch-up basis

If an entity determines that the criteria in IFRS 15 9 are subsequently met, revenue is recognised on a cumulative catch-up basis as at the date when a contract exists within the scope of the model (i.e., at the ‘contract establishment date’, reflecting the performance obligations that are partially, or fully, satisfied at that date. Arrangements that do not meet the definition of a contract

TRG Agenda paper no. 33 discussion

This accounting is consistent with the discussion in TRG agenda paper no. 33, which states that the cumulative catch-up method “best satisfies the core principle” in IFRS 15.21Arrangements that do not meet the definition of a contract


TRG Agenda paper no. 33 excerpt

See the following Q&A to further clarify the subject:

Question: If an entity begins activities on a specifically anticipated contract either: (1) before it agrees to the contract with the customer; or (2) before the arrangement meets the criteria to be considered a contract under the standard, how would revenue for those activities be recognised at the date a contract exists? [TRG meeting 30 March 2015 – Agenda paper no. 33]

Agreement

TRG members generally agreed that if the goods or services that ultimately will be transferred meet the criteria to be recognised over time, revenue would be recognised on a cumulative catch-up basis at the ‘contract establishment date’, reflecting the performance obligation(s) that are partially or fully satisfied at that time. The TRG agenda paper noted that the cumulative catch-up method is considered to be consistent with the overall principle of the standard that revenue is recognised when (or as) an entity transfers control of goods or services to a customer. Arrangements that do not meet the definition of a contract


Non-refundable considerationRefund policy

If an arrangement does not meet the criteria in IFRS 15 9 (and until the criteria are met), an entity only recognises non-refundable consideration received as revenue when one of the events outlined above in the decision tree has occurred (i.e., full performance and all (or substantially all) consideration received or the contract has been terminated) or the arrangement subsequently meets the criteria in IFRS 15 9. Arrangements that do not meet the definition of a contract

Initial accounting

Until one of these events happens, any consideration received from the customer is initially accounted for as a liability (not revenue) and the liability is measured at the amount of consideration received from the customer. Arrangements that do not meet the definition of a contract

Modification of contracts

There is no specific requirement in the standard to reconsider whether a contract meets the definition of a contract when it is modified. However, if a contract is modified, we believe that may indicate that “a significant change in facts and circumstances” has occurred (see IFRS 15 13) and that the entity should reassess the criteria in IFRS 15.9 for the modified contract. Arrangements that do not meet the definition of a contract

Reassessments

Any reassessment is prospective in nature and would not change the conclusions associated with goods or services already transferred. That is, an entity would not reverse any receivables, revenue or contract assets already recognised under the contract because of the reassessment of the contract criteria in IFRS 15 9. However, due to the contract modification accounting (see link to contract modifications), the entity may need to adjust contract assets or cumulative revenue recognised in the period of the contract modification. Arrangements that do not meet the definition of a contract

See also: The IFRS Foundation

Arrangements that do not meet the definition of a contract

Arrangements that do not meet the definition of a contract

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