Distinct goods or services – Why do we need to know?
Cambridge dictionary definition: Distinct means clearly noticeable – that clearly exists, and an adjective at the same definition that is very useful to IFRS 15: clearly separate and different (from something else). Distinct goods or services
So a first clarification is: Distinct goods or services = Goods or services that are clearly separate and different from each other.
Some variations resulting from this: Distinct goods or services
Good(s) clearly separate and different from (an)other good(s), Good(s) clearly separate and different from a service, Service(s) clearly separate and different from (an)other service(s). Distinct goods or services
So now we are up to the more IFRS-ish language on how to decide whether or NOT a service or a good is distinct – but is all comes down to the first clarification above with more details and/or variations included. Distinct goods or services
Assessment of distinct or non-distinct
A good or service (or bundle of goods and services) is distinct if the customer can benefit from the good or service on its own or together with other readily available resources (i.e., the good or service is capable of being distinct) and the good or service is separately identifiable from other promises in the contract (i.e., the good or service is distinct within the context of the contract). A promised good or service that an entity determines is not distinct is combined with other goods or services until a distinct performance obligation is formed.
Use the following decision tree to identify distinct goods/services or to combine them to come to a distinct bundle of goods/services:
Example Licensing Distinct goods or services
A license establishes a customer’s rights to the intellectual property of an entity. Licenses of intellectual property may include, but are not limited to, licenses of any of the following: Distinct goods or services
- Software (other than specific software subject to a hosting arrangement) and technology Distinct goods or services
- Motion pictures, music, and other forms of media and entertainment Distinct goods or services
- Franchises Distinct goods or services
- Patents, trademarks, and copyrights.Distinct goods or services
In addition to a promise to grant a license (or licenses) to a customer. Distinct goods or services
Explicit or implied promises
Those promises may be explicitly stated in the contract or implied by an entity’s customary business practices, published policies, or specific statements. As with other types of contracts, when a contract with a customer includes a promise to grant a license (or licenses) in addition to other promised goods or services, an entity identifies each of the performance obligations in the contract (as per above diagram).
If the promise to grant a license is not distinct from other promised goods or services in the contract in accordance with the identification criteria, an entity should account for the promise to grant a license and those other promised goods or services together as a single performance obligation (‘bundling‘)
Examples of licenses that are not distinct from other goods or services promised in the contract include the following:
- A license that forms a component of a tangible good and that is integral to the functionality of the good
- A license that the customer can benefit from only in conjunction with a related service (such as an online service provided by the entity that enables, by granting a license, the customer to access content).
So where do we use distinct goods and services?
The criterion – Distinct goods or services = Goods or services that are clearly separate and different from each other – is used in certain IFRS 15 decisions, such as:
Identify performance obligations Distinct goods or services
A performance obligation is a promise in a contract to transfer to a customer either:
- a good or service (or a bundle of goods or services) that is distinct; or
- a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.
Factors that indicate that two or more promises to transfer goods or services to a customer are not separately identifiable include (but are not limited to):
- The entity provides a significant service of integrating the goods or services with other goods or services promised in the contract.
- One or more of the goods or services significantly modifies or customizes the other goods or services.
- The goods or services are highly interdependent or highly interrelated.
A contract modification is accounted for as either a separate contract or as part of the existing contract. This assessment is driven by (1) whether the modification adds distinct goods and services and (2) whether the distinct goods and services are priced at their standalone selling prices.
Renew or extend?
When service contracts are modified to renew or extend the services being provided, the added services will often be distinct. The modification is accounted for as a separate contract if the services are distinct and the price of the added services reflects standalone selling price, including appropriate adjustments to reflect the circumstances of the particular contract (e.g., a discount given because the company does not incur the selling-related costs it incurs for new customers).
The modification is accounted for prospectively if the services are distinct, but the price of the added services does not reflect standalone selling price; that is, any unrecognized revenue from the original contract and the additional consideration from the modification is combined and allocated to the remaining unsatisfied performance obligations under both the existing contract and modification.
Now you know why we need to know whether a good or service is distinct? Distinct goods or services
See also: The IFRS Foundation