Input method Measuring progress to completion is part of IFRS 15 Revenue from Contracts with Customers (contents page is here), which 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 5 Recognise revenue as or when each performance obligation is satisfied and the sub-step Measuring progress toward complete satisfaction of a performance obligation. Input methods result in revenue being recognised based on the vendor’s efforts or inputs towards the satisfaction of a performance obligation. When the vendor’s efforts or inputs are expended evenly throughout the performance period, it may be appropriate for a vendor to recognise revenue on a straight-line basis.
Relationship with the transfer of goods or service
A drawback of input methods is that there may not be a direct relationship between the vendor’s inputs and the transfer of goods or services to a customer. Therefore, when using a cost-based input method, an adjustment to the measure of progress may be required if certain costs incurred do not contribute to the vendor’s progress in satisfying its performance obligation(s).
This would be the case when costs incurred are attributable to significant inefficiencies in the vendor’s performance which were not reflected in the price of the contract. In addition, certain costs may not be proportionate to the vendor’s progress in satisfying a performance obligation, and IFRS 15 then requires an adjustment to be made to the amount of profit recognised to date.
For example if, as part of a contract to refurbish a building, a vendor needs to purchase new elevators from a third party, the vendor will recognise revenue when control of the elevators is transferred to the customer, but will recognise no incremental profit. This is because arranging the delivery of the elevators to the customer’s premises does not result in any progress being made towards the refurbishment of the building.
Measurement performance obligations
In some cases, a vendor may not be able reasonably to measure the outcome of a performance obligation, but may expect to recover the costs incurred in satisfying that performance obligation (e.g. in the early stages of a contract). In these circumstances, the vendor recognises revenue only to the extent of the costs incurred to date, until such time that it can reasonably measure the outcome of the performance obligation. Input method Measuring progress to completion
This guidance is similar to the practice in IAS 11 Construction Contracts when a vendor cannot estimate the costs in a long term contract and applies the zero margin method (IFRS 15 B19). Input method Measuring progress to completion
Comparison input and output method
Based on an entity’s efforts or inputs towards satisfying a performance obligation, relative to the total expected inputs into the satisfaction of that performance obligation
Based on direct measurements of the value to the customer of goods or services transferred to date, relative to the remaining goods or services promised under the contract
Recognise revenue on a straight-line basis
If an input method provides an appropriate basis to measure progress and an entity’s inputs are incurred evenly over time, then it may be appropriate to recognise revenue on a straight-line basis (IFRS 15 B18). Input method Measuring progress to completion
For performance obligations that are satisfied over time, an entity describes the method used to recognise revenue – e.g. a description of the output or input method and how those methods are applied – and why the methods are a faithful depiction of the transfer of goods or services (IFRS 15 124). Input method Measuring progress to completion
See also: The IFRS Foundation