An entity recognises revenue only when it satisfies a performance obligation by transferring control of a promised good or service to the customer. Control of an asset refers to the ability of the customer to direct the use of and obtain substantially all of the cash inflows, or the reduction of cash outflows, generated by the goods or services. Control also means the ability to prevent other entities from directing the use of, and receiving the benefit from, a good or service. Satisfaction of performance obligations
The standard indicates that an entity must determine at contract inception whether it will transfer control of a promised good or service over time. If an entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time. A performance obligation is satisfied at a point in time unless it meets one of the following criteria to be satisfied over time: Satisfaction of performance obligations
- The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs – by providing hosting services, for example.
- The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced. An example would be installing network equipment on the customer’s premises, if the customer controls the equipment during the installation period. Satisfaction of performance obligations
- The entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. An example would be significantly customising an asset to the customer’s specifications and the entity also has a right to payment for performance completed to date. As a result of the customisation, it is less likely that the entity would be able to use the asset for another purpose (e.g., sell to a different customer) without incurring significant costs to re-purpose the asset.
When a performance obligation is satisfied over time, the standard requires an entity to select a single method, either an input method or an output method, to measure progress for each performance obligation that best depicts the pattern of the entity’s performance in transferring the control of the good or service over time.
Output methods are used to recognise revenue on the basis of units produced or delivered, contract milestones, time elapsed or surveys of services transferred to date relative to the total services to be transferred. The Boards provided a practical expedient for an entity that has a right to payment from a customer in an amount that corresponds directly with the value of the entity’s performance completed to date (e.g., a professional services contract in which a technology entity charges a fixed amount for each hour of service provided) to recognise revenue in the amount for which it has a right to invoice. However, this expedient only applies when the performance obligation is satisfied over time and an output method is used to measure progress. Satisfaction of performance obligations
Input methods are used to recognise revenue on the basis of the entity’s efforts (or inputs) to satisfy a performance obligation relative to the total expected inputs needed to satisfy that performance obligation. Input methods can include labour hours used, costs incurred, time elapsed or machine hours used. The standard does not indicate a preference for either type of method (output or input). However, it does require that the selected method be applied consistently to similar performance obligations and in similar circumstances. Satisfaction of performance obligations
Although IFRS 15 requires an entity to update its measure of progress, it does not allow a change in method. For example, it would not be appropriate for a technology entity to start recognising revenue for a performance obligation based on labour hours expended and then switch to milestones reached. Satisfaction of performance obligations
For performance obligations that are not transferred over time, control is transferred at a point in time. For example, when a customer purchases computer hardware, control generally transfers to the customer when the computer hardware is delivered. The standard provides indicators to help entities determine when control transfers, including right to payment, legal title, physical possession, risks and rewards of ownership and customer acceptance. Satisfaction of performance obligations