Revenue recognition over time – alternative use

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.

This section is part of step 5 Recognise revenue as or when each performance obligation is satisfied. The performance obligation may be satisfied over time as a result of the fact that a vendor does not have a practical alternative use for an asset. The vendor would incur significant economic losses to direct the asset for another use (see below). This may occur in some manufacturing contracts where the basic design of the asset is the same across all contracts, yet the customisation is substantial and therefore to redirect a nearly completed asset to another customer would require significant rework. Revenue recognition over time – alternative use

A vendor does not consider the possibility of a contract termination in assessing whether the vendor is able to redirect the asset to another customer.

Further explanation alternative use Revenue recognition over time – alternative use

A vendor does not have an alternative use for an asset if the vendor is unable, either contractually or practically, readily to direct the asset (which may be a partially completed asset) for another use during the creation or enhancement of that asset. The assessment is made at contract inception, and takes into account the characteristics of the asset that will ultimately be transferred. It is not updated unless there is a modification to the contract that results in a substantive change to the vendor’s performance obligation(s).

The contractual ‘alternative use’ restriction applies if the vendor would expect the customer to enforce its rights to the promised asset if the vendor sought to direct the asset for another use. However, a contractual restriction is not substantive if, for example, an asset is largely interchangeable with other assets that the vendor could transfer to the customer without breaching the contract and without incurring significant costs that otherwise would not have been incurred in relation to that contract. This might apply when the asset being sold is mass produced, and it would be straightforward for one item to be sold and another substituted. This would apply even if each of the items produced (for example, a car) could be specified individually by each customer from a range of optional extras, because it is straightforward for another car to be produced with the same options.

A vendor does not have a practical alternative use for an asset if the vendor would incur significant economic losses to direct the asset for another use, for example,

  • Incurring significant costs to rework the asset, or
  • Only being able to sell the asset at a significant loss.

A vendor does not consider the possibility of a contract termination in assessing whether the vendor is able to redirect the asset to another customer.

Revenue recognition over time – alternative use

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