The revenue standard excludes from its scope contracts with a collaborator or a partner that are not customers, but rather share with the entity the risks and rewards of participating in an activity or process. However, a contract with a collaborator or a partner is in the scope of the revenue standard if the counterparty meets the definition of a customer for part or all of the arrangement. Accordingly, a contract with a customer may be part of an overall collaborative arrangement and the revenue standard is applied to that part.
Example: Development of a new drug
Biotech signs an agreement with Pharma to share equally in the development of a specific drug candidate.
Is there a customer in the scope of IFRS 15? Identifying the customer or collaborative arrangement
Analysis Identifying the customer or collaborative arrangement
It depends……….and this is the reasoning: Identifying the customer or collaborative arrangement
It is unlikely that the arrangement is in the scope of IFRS 15 if the entities will simply work together to develop the drug.
It is likely in the scope of IFRS 15 if the substance of the arrangement is that Biotech is selling its compound to Pharma and/or providing research and development services to Pharma, if those activities are part of Biotech’s ordinary activities.
Entities should consider whether other applicable guidance (IFRS 11 Joint Arrangements) exists that should be applied when an arrangement is a collaboration rather than a contract with a customer.
Example: Automotive collaborative agreement
Automotive Supplier S enters into an arrangement with Carmaker D to develop a new technology for D’s cars. Both S and D agree to participate equally in the costs and results of the engineering and development activities. Under the arrangement, S will also produce 100 units of the part developed for payment of 10,000. Because the parties are active participants and share in the risks and rewards of the engineering and development activities – i.e. the technology – part of the contract related to the engineering and development could be a collaborative arrangement. However, there is also a revenue contract to produce a series of parts within the overall agreement, which is accounted for under the revenue standard.