Although IFRS 15 specifies the accounting for an individual contract with a customer, the Standard allows as a practical expedient that it can be applied to a portfolio of contracts (or performance obligations) with similar characteristics provided that it is reasonably expected that the effects on the financial statements of applying a portfolio approach will not differ materially from applying IFRS 15 to the individual contracts (or performance obligations) within that portfolio. When accounting for a portfolio, estimates and assumptions that reflect the size and composition of the portfolio should be used. [IFRS 15 4]
Many entities manage a very large number of customer contracts and offer a wide array of product combination options (e.g. entities in the telecommunications industry may offer a wide selection of handsets and wireless usage plan options). For these entities, it takes significant effort to apply some of the requirements of IFRS 15 (e.g. the requirement to allocate based on the stand-alone selling price to the identified performance obligations) on an individual contract basis.
Entities need to evaluate whether they are eligible to use a portfolio approach under IFRS 15 4. IFRS 15 does not provide explicit guidance on how to
- evaluate ‘similar characteristics’, and Portfolio of contracts (or performance obligations)
- establish a reasonable expectation that the effects of applying a portfolio approach would not differ materially from those of applying the Standard at a contract or performance obligation level.
Accordingly, entities need to exercise significant judgement in determining that the contracts or performance obligations that they have segregated into portfolios have similar characteristics at a sufficiently granular level to ensure that the outcome of using a particular portfolio approach can reasonably be expected not to differ materially from the results of applying the Standard to each contract or performance obligation in the portfolio individually.
In segregating contracts (or performance obligations) with similar characteristics into portfolios, entities have to apply objective criteria associated with the particular contracts or performance obligations and their accounting consequences. When determining whether particular contracts have similar characteristics, entities find it helpful to focus particularly on those characteristics that have the most significant accounting consequences under IFRS 15 in terms of their effect on the timing of revenue recognition or the amount of revenue recognised. Accordingly, the assessment of which characteristics are most important for determining similarity depend on an entity’s specific circumstances. However, there are also be practical constraints on the entity’s ability to use existing systems to analyse a portfolio of contracts, and these constraints affect the determination of how the portfolio is segregated.
The table below lists objective criteria that entities might consider when assessing whether particular contracts or performance obligations have similar characteristics in accordance with IFRS 15 4. And off course, practice is always more challenging than theory, so the list provided is not exhaustive, it is just to provide a head-start……..
Mix of products and services, options to acquire additional goods and services, warranties, promotional programmes
Short-term, long-term, committed or expected term of contract
Terms and conditions contract
Rights of return, shipping terms, bill and hold, consignment, cancellation of the privileges and other similar clauses
Amount, form and timing of consideration
Fixed, time and material, variable, upfront fees, non-cash, significant financing component
Characteristics of the customers
Size, type, creditworthiness, geographical location, sales channel
Characteristics of the entity
Volume of contracts that include the different characteristics, historical information available
Timing of transfer of goods or services
Over time or at a point in time
Example – Telecommunications Portfolio of contracts (or performance obligations)
Entity A offers various combinations of handsets and usage plans to its customers under two-year contracts. It offers two handset models: an older model that it offers free of charge (stand-alone selling price is CU250); and the most recent model, which offers additional features and functionalities and for which the entity charges CU200 (stand-alone selling price is CU500). The entity also offers two usage plans: a 400-minute plan and an 800-minute plan. The 400-minute plan sells for CU40 per month, and the 800-minute plan sells for CU60 per month (which also corresponds to the stand-alone selling price for each plan). Portfolio of contracts (or performance obligations)
The table below illustrates the possible product combinations and the allocation of consideration for each under IFRS 15.
Total transaction price
Revenue on handset
Revenue on usage
% of total
% of total
Old handset, 400 minutes
Old handset, 800 minutes
New handset, 400 minutes
New handset, 800 minutes
X = Y + Z | AA + AB = 100% (for me a dummy)
In this example, the proportion of the total transaction price allocated to handset revenue is determined by comparing the stand-alone selling price for the phone to the total of the stand-alone selling prices of the components of the contract. Portfolio of contracts (or performance obligations)
Customer A: (CU250 / (CU250 + CU960) × CU960) = CU198
Customer B: (CU250 / (CU250 + CU1,440) × CU1,440) = CU213
Customer C: (CU500 / (CU500 + CU960) × CU1,160) = CU397
Customer D: (CU500 / (CU500 + CU1,440) × CU1,640) = CU423
As the table indicates, the effects of each product combination on the financial statements differ from those of the other product combinations. The four customer contracts have different characteristics, and it is difficult to demonstrate that Entity A ‘reasonably expects’ that the financial statement effects of applying the guidance to the portfolio (the four contracts together) ‘would not differ materially’ from those of applying the guidance to each individual contract.
Entity A may consider two options: Portfolio of contracts (or performance obligations)
- The percentage of contract consideration allocated to the handset under the various product combinations ranges from 15 per cent to 34 per cent. Entity A may consider that this range is too wide to apply a portfolio approach, and if so, some level of segregation would be required, or
- Entity A might determine that there are two portfolios – one for old handsets and the other for new handsets. Under this alternative approach, Entity A would need to perform additional analysis to assess whether the accounting consequences of using two rather than four portfolios would result in financial statement effects that differ materially.
In practice, however, the contracts illustrated could involve additional layers of complexity, such as:
- different contract durations; Portfolio of contracts (or performance obligations)
- different call and text messaging plans;
- different pricing schemes (e.g. fixed or variable pricing based on usage);
- different promotional programmes, options, and incentives; and
- contract modifications.
Accounting for such contracts is further complicated by the rapid pace of change in product offerings.
While there is no requirement in IFRS 15 to quantitatively evaluate whether using a portfolio approach would produce an outcome materially different from that of applying the guidance at the contract or performance obligation level, an entity should be able to demonstrate why it reasonably expects the two outcomes not to differ materially. The entity may do so by various means depending on its specific circumstances (subject to the constraints of a cost-benefit analysis).
Such means include, but are not limited, to the following:
- data analytics (for example using big data techniques) based on reliable assumptions and underlying data (internally- or externally-generated) related to the portfolio;
- a sensitivity analysis that evaluates the characteristics of the contracts or performance obligations in the portfolio and the assumptions used to determine a range of potential differences in applying the different approaches; and
- a limited quantitative analysis, supplemented by a more extensive qualitative assessment that may be performed when the portfolios are disaggregated.
Typically, some level of objective and verifiable information would be necessary to demonstrate that using a portfolio approach would not result in a materially different outcome. An entity may also wish to:
- consider whether the costs of performing this type of analysis potentially outweigh the benefits of accounting on a portfolio basis, and
- assess whether it is preferable to invest in systems solutions that would allow accounting on an individual contract basis.