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. Performance obligations satisfied over time
This section is part of step 5 Recognise revenue as or when each performance obligation is satisfied. A vendor satisfies a performance obligation and recognises revenue over time when one of the following three criteria is met: Performance obligations satisfied over time
- The customer simultaneously receives and consumes the economic benefits provided by the vendor’s performance
- The vendor creates or enhances an asset controlled by the customer
- The vendor’s performance does not create an asset for which the vendor has an alternative use, the vendor has an enforceable right to payment for performance completed to date.
i The customer simultaneously receives and consumes the economic benefits provided by the vendor’s performance
This criterion applies to certain contracts for services, and in some cases it will be straightforward to identify that it has been met. For example, for routine or recurring services (such as cleaning services) it will be clear that there is simultaneous receipt by the customer of the vendor’s performance. The concept of control of an asset applies, because services are viewed as being an asset (if only momentarily) when they are received and used. Performance obligations satisfied over time
For other performance obligations, it may be less straightforward to identify whether there is simultaneous receipt and consumption of the benefits from the vendor’s performance. In these cases, a key test is whether, in order to complete the remaining performance obligations, another vendor would need to substantially re-perform the work the vendor has completed to date. If another vendor would not need to do so, then it is considered that the customer is simultaneously receiving and consuming the economic benefits arising from the vendor’s performance.
In determining whether another entity would need substantially to reperform the work completed to date, the vendor is required to:
- Disregard any contractual or practical barriers to the transfer of the remaining performance obligations to another entity; and
- Presume that any replacement vendor would not benefit from an asset that it currently controls (such as a work in progress balance).
ii The vendor creates or enhances an asset controlled by the customer
This criterion is most likely to be relevant when an asset is being constructed on the customer’s premises. The asset being sold by the vendor could be tangible or intangible (for example, a building that is being constructed on land owned by the customer, or customised software that is being written into a customer’s existing IT infrastructure).
iii The vendor’s performance does not create an asset for which the vendor has an alternative use, the vendor has an enforceable right to payment for performance completed to date
This two-step criterion may be relevant to entities in the construction and real estate sector, and also applies when a specialised asset is to be constructed that can only be used by the customer. It may also apply when an asset is to be constructed to a customer’s specification.