Implicit Promises In A Contract – FAQ | IFRS

Implicit promises in a contract

IFRS 15 Revenue from Contracts with Customers (contents page is here) introduced a single and comprehensive framework which sets out how much revenue is to be recognised, and when. The core principle is that a vendor should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the vendor expects to be entitled in exchange for those goods or services. See a summary of IFRS 15 here.

This section is part of step 2 identifying performance obligations. Goods or services that are to be transferred to a customer are normally specified in a contract.

However, a contract may also include promises that are implied by a vendor’s customary business practices, published policies, or specific statements if those promises create a valid customer expectation that the vendor will transfer a good or service to it.

This links to IFRS 15 extending the definition of a contract to include those which are written, oral, or implied by a vendor’s customary business practices (provided in all cases that the arrangements are enforceable). Consequently, the performance obligations identified in a contract with a customer may not be limited to the goods or services that are explicitly promised in that contract.

Performance obligations do not include activities that a vendor must perform in order to fulfil a contract, unless the vendor transfers a good or service to the customer as those activities occur. For example, a service provider may need to perform various administrative tasks to set up a contract.

The performance of those tasks does not transfer a service to the customer as the tasks are performed and are therefore not performance obligations.

Implicit promises in a contract activities that a vendor must perform in order to fulfil a contract

Implicit promises in a contract activities that a vendor must perform in order to fulfil a contract

Implicit promises in a contract Implicit promises in a contract 

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