Revenue over time or at a point in time

There are two ways of recognising revenue, revenue recognition over time and revenue recognition at a point in time. Revenue recognition over time is often referred to as the ‘Percentage of completion‘ method under the (superseded) IAS 11 Construction contracts.

The primary IFRS sections are IFRS 15 35 – 37 Over time and IFRS 15 38 At a point in time.Construction contracts revenue - over time or at a point in time?

An entity determines at the inception of the contract whether it satisfies each performance obligation over time or at a point in time. If an entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time. [IFRS 15 32]

IFRS 15 requires entities to determine whether a performance obligation is satisfied (and revenue is recognised) over time, or whether a performance obligation is satisfied (and revenue is recognised) at a point in time for all contracts. No practical expedients are available that would permit, for example for contracts with a short duration (e.g. less than a year), simply defaulting to point-in-time recognition.

Entities should carefully analyse the contractual arrangement in accordance with the requirements of IFRS 15 35 to determine whether a performance obligation is satisfied over time or at a point in time, even for short-duration contracts.

How does an assessment of whether revenue is recognised over time or revenue is recognised at a point in time look like?

Revenue over time / at a point in time

Check

Example 13: An entity enters into a contract to provide monthly payroll processing services to a customer for one year.

IFRS 15 22(b) – Single performance obligation

Yes – The promise is payroll processing service

IFRS 15 35(a) – Simultaneous receipt and consumption

Yes – Each month processing transactions

IFRS 15 39–45IFRS 15 B14–B19Recognition over time

Conclusion: Measure progress on a monthly bases, completion in month 12. In between termination leads to payment of completion to date.

Example 14: 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.

IFRS 15 35(a)IFRS 15 B3 – B4 – Simultaneous receipt and consumption

No – Only when receiving the opinion

IFRS 15 35(c) – Alternative use:

IFRS 15 36

IFRS 15 B6–B8

No – Opinion is no asset with alternative use – only of specific use to customer

IFRS 15 35(c) – Payment enforceable for performance completed to date

IFRS 15 37

IFRS 15 B9–B13

Yes – Enforceable right for payment of costs and reasonable margin. 15% margin is reasonable.

IFRS 15 39–45IFRS 15 B14–B19Recognition over time

Conclusion: Progress over time, in between termination leads to payment of completion to date.

For example: It takes 50 hours to complete (input method), contract is terminated after 30 hours. Invoice is 30 hours, hourly standard (payroll) costs rate plus 15% margin.

Example 15: An entity enters into a contract with a customer, a government agency, to build a specialised satellite.

IFRS 15 35(c), 36 and B6–B8 of IFRS 15 – Alternative use

No alternative use – No contractual limits to sell to others, but rework not economically possible.

IFRS 15 39–45IFRS 15 B14–B19Recognition over time

Conclusion: Progress over time, in between termination leads to payment of completion to date.

Example 16: An entity enters into a contract with a customer to build an item of equipment. The payments are non-refundable unless the entity fails to perform as promised. If the customer terminates the contract, the entity is entitled only to retain any progress payments received from the customer. The entity has no further rights to compensation from the customer.

IFRS 15 35(c) – Payment enforceable for performance completed to date

IFRS 15 37

IFRS 15 B9–B13 Revenue over time or at a point in time

No – Payments do not always throughout the progress of the contract cover performance completed to date. No further rights to compensation exist.

IFRS 15 38Recognition at a point in time

Conclusion: No right to payment for performance completed to date. IFRS 15 35(c) – Performance obligation is not satisfied over time

Example 17: An entity is developing a multi-unit residential complex. A customer enters into a binding sales contract with the entity for a specified unit that is under construction. Each unit has a similar floor plan and is of a similar size, but other attributes of the units are different (for example, the location of the unit within the complex).

Case A: The customer pays a deposit upon entering into the contract and the deposit is refundable only if the entity fails to complete construction of the unit in accordance with the contract. The remainder of the contract price is payable on completion of the contract when the customer obtains physical possession of the unit. If the customer defaults on the contract before completion of the unit, the entity only has the right to retain the deposit.

IFRS 15 35(c) – Payment enforceable for performance completed to date

IFRS 15 37 Revenue over time or at a point in time

IFRS 15 B9–B13 Revenue over time or at a point in time

No – Enforceable right exists only at completion of construction of the unit.

IFRS 15 38Recognition at a point in time

Conclusion: No right to payment for performance completed to date. IFRS 15 35(c) – Performance obligation is not satisfied over time

Case B: The customer pays a non-refundable deposit upon entering into the contract and will make progress payments during construction of the unit. The contract has substantive terms that preclude the entity from being able to direct the unit to another customer. In addition, the customer does not have the right to terminate the contract unless the entity fails to perform as promised. If the customer defaults on its obligations by failing to make the promised progress payments as and when they are due, the entity would have a right to all of the consideration promised in the contract if it completes the construction of the unit. The courts have previously upheld similar rights that entitle developers to require the customer to perform, subject to the entity meeting its obligations under the contract.

IFRS 15 35(c), 36 and B6–B8 of IFRS 15 – Alternative use

Alternative use – No contractual limits to sell to others, rework economically possible.

IFRS 15 35(c) – Payment enforceable for performance completed to date

IFRS 15 37 Revenue over time or at a point in time

IFRS 15 B9–B13 Revenue over time or at a point in time

Yes – Enforceable right to all of the consideration exists.

IFRS 15 39–45IFRS 15 B14–B19Recognition over time

Conclusion: Progress over time, in between termination leads to payment of all of the consideration. But the entity has to estimate which potential consideration will be actually received.

Case C: Same as case B, except that in the event of a default by the customer, either the entity can require the customer to perform as required under the contract or the entity can cancel the contract in exchange for the asset under construction and an entitlement to a penalty of a proportion of the contract price.

IFRS 15 35(c) – Payment enforceable for performance completed to date

IFRS 15 37

IFRS 15 B9–B13

Yes – Enforceable right for payment for performance completed to date.

IFRS 15 39–45IFRS 15 B14–B19Recognition over time Revenue over time or at a point in time

Conclusion: Progress over time, in between termination leads to payment of all of the consideration. But the entity has to estimate which potential consideration will be actually received.

IFRS 15 B11 – The entity able to cancel the contract has no effect, provided that the entity’s enforceable rights remain in tact.

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