IFRS 15 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 over time if it meets one of the following criteria: Transfer of control for distinct licences
- The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs – by providing hosting services, for example. Transfer of control for distinct licences
- The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced. An example would be a promise to develop an IT system on the customer’s premises, if the customer controls the system during the development period.
- 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 the 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. Transfer of control for distinct licences
If an entity determines that a performance obligation is satisfied over time, it recognises revenue over the period the performance obligation is satisfied, using an output or input method that best depicts the pattern of the transfer of control over time. Transfer of control for distinct licences
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 have 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 to recognise revenue in the amount for which it has a right to invoice. Software entities may find it appropriate to apply this practical expedient to a professional services contract in which it charges a fixed amount for each hour of service provided. This expedient only applies when the performance obligation is satisfied over time and an output method is used to measure progress. Transfer of control for distinct licences
Input methods are used to recognise revenue on the basis of the entity’s efforts (or inputs) to the satisfaction of 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. Transfer of control for distinct licences
Although the standard requires an entity to update its measure of progress, it does not allow a change in methods. For example, it would not be appropriate for an entity to start recognising revenue for a performance obligation based on labour hours expended and then switch to milestones.
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 provided. 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.
Transfer of control for distinct licences