Part of the main section Recognition – Performance obligations satisfied over time
Examples 13–17 illustrate the requirements in paragraphs 35–37 and B2–B13 of IFRS 15 on performance obligations satisfied over time. In addition, the following requirements are illustrated in these examples:
- paragraphs 35(a) and B3–B4 of IFRS 15 on when a customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs (Examples 13–14); and
- paragraphs 35(c), 36–37 and B6–B13 of IFRS 15 on an entity’s performance that does not create an asset with an alternative use and an entity’s enforceable right to payment for performance completed to date (Examples 14–17).
Example 14—Assessing alternative use and right to payment
IE69 An entity enters into a contract with a customer to provide a consulting service that results in the entity providing a professional opinion to the customer. The professional opinion relates to facts and circumstances that are specific to the customer. If the customer were to terminate the consulting contract for reasons other than the entity’s failure to perform as promised, the contract requires the customer to compensate the entity for its costs incurred plus a 15 per cent margin. The 15 per cent margin approximates the profit margin that the entity earns from similar contracts.
IE70 The entity considers the criterion in paragraph 35(a) of IFRS 15 and the requirements in paragraphs B3 and B4 of IFRS 15 to determine whether the customer simultaneously receives and consumes the benefits of the entity’s performance. If the entity were to be unable to satisfy its obligation and the customer hired another consulting firm to provide the opinion, the other consulting firm would need to substantially re-perform the work that the entity had completed to date, because the other consulting firm would not have the benefit of any work in progress performed by the entity. The nature of the professional opinion is such that the customer will receive the benefits of the entity’s performance only when the customer receives the professional opinion. Consequently, the entity concludes that the criterion in paragraph 35(a) of IFRS 15 is not met.
IE71 However, the entity’s performance obligation meets the criterion in paragraph 35(c) of IFRS 15 and is a performance obligation satisfied over time because of both of the following factors:
- in accordance with paragraphs 36 and B6–B8 of IFRS 15, the development of the professional opinion does not create an asset with alternative use to the entity because the professional opinion relates to facts and circumstances that are specific to the customer. Therefore, there is a practical limitation on the entity’s ability to readily direct the asset to another customer.
- in accordance with paragraphs 37 and B9–B13 of IFRS 15, the entity has an enforceable right to payment for its performance completed to date for its costs plus a reasonable margin, which approximates the profit margin in other contracts.
IE72 Consequently, the entity recognises revenue over time by measuring the progress towards complete satisfaction of the performance obligation in accordance with paragraphs 39–45 and B14–B19 of IFRS 15.
PREVIOUS CHAPTER: Customer receives and consumes
NEXT CHAPTER: No alternative use to the entity