Output Method Measuring Progress To Completion – FAQ | IFRS

Output method Measuring progress to completion

Output method Measuring progress to completion is part of IFRS 15 Revenue from Contracts with Customers (contents page is here), that  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.

Step 5 Recognise revenue – measuring progress to completion

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. Output methods result in revenue being recognised based on direct measurement of the value of goods or services transferred to date in comparison with the remaining goods or services to be provided under the contract.

Evaluation of output method

When evaluating whether to apply an output method, consideration is given to whether the output selected would reflect the vendor’s performance toward complete satisfaction of its performance obligation(s). An output method would not reflect the vendor’s performance if the output selected fails to measure a material amount of goods or services (for example, work in progress or finished goods) which are controlled by the customer.

Vendor’s right to consideration from a customer

As a practical expedient (provided in paragraph IFRS 15 B16), if the amount of a vendor’s right to consideration from a customer corresponds directly with the value to the customer of the vendor’s performance completed to date (e.g. a service contract in which a vendor bills a fixed amount for each hour of service provided), the vendor recognises revenue at the amount to which the vendor has the right to invoice.

When the information that is required to apply an output method is not observable, or is not available without undue cost, it may be necessary to use an input measurement method. Output method Measuring progress to completion

Output method Measuring progress to completion

Direct measurement

Output methods are covered in IFRS 15 B15-B17. Output methods are based on direct measurement of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract. Measurement methods include surveys, milestones reached, time elapsed or units delivered. Measurement method should take into account all goods and services promised in the contract. The advantage of output methods is that they it directly measures the value of the goods or services transferred to the customer. Output method Measuring progress to completion

Milestone method may not depict pattern of performance

If control transfers to the customer over time, then the measure of progress should reflect this. Although the standard lists milestones as an example of a possible measure of progress when using an output method, it remains necessary to consider whether milestones faithfully depict performance, particularly if the milestones are widely spaced. This is because control generally transfers continuously as the entity performs, rather than at discrete points in time. Normally, a milestone method would need to incorporate a measure of progress between milestone achievements to faithfully depict an entity’s performance.

Work in progress

Work in progress for an over-time performance obligation is generally expensed as a fulfilment cost when it is incurred because control of the work in progress transfers to the customer as it is produced and not at discrete intervals. However, inventory to support multiple contracts that has an alternative use is recognised as an asset until it is dedicated to a specific contract – e.g. by being integrated into the production process.

Revenue recognised over time

If revenue is recognised over time, the overall principle is that revenue is recognised to the extent that each of the vendor’s performance
obligations has been satisfied.

Output or input method

IFRS 15 permits either output or input methods to be used to calculate the amount of revenue to be recognised. An output method results in revenue being recognised on the basis of direct measurement of the value of goods or services transferred to date, while input methods result in revenue being recognised based on measures such as resources consumed, costs incurred or time records.

See also: The IFRS Foundation

Output method Measuring progress to completion

Output method Measuring progress to completion Output method Measuring progress to completion 

Output method Measuring progress to completion Output method Measuring progress to completion

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