2.1.1 Evaluating whether a customer simultaneously receives and consumes the benefits of a commodity as the entity performs

In July 2015, the TRG members discussed the factors that an entity should consider when evaluating whether a customer simultaneously receives and consumes the benefits of a commodity (e.g. electricity, natural gas, heating oil) as the entity performs.³

The TRG members generally agreed that an entity would consider all known facts and circumstances when evaluating whether a customer simultaneously receives and consumes the benefits of a commodity. These may include the inherent characteristics of the commodity (e.g. whether the commodity can be stored), contract terms (e.g. a continuous supply contract to meet immediate demands) and information about infrastructure or other delivery mechanisms.

As such, revenue related to the sale of a commodity may or may not be recognised over time, depending on whether the facts and circumstances of the contract indicate that the customer simultaneously receives and consumes the benefits. This evaluation may require the use of significant judgement.

Whether a commodity meets this criterion and is transferred over time is important in determining whether the sale of a commodity meets the criteria to apply the series requirement (see Chapter 28 at 3.2.2). This, in turn, affects how an entity allocates variable consideration and apply the requirements for contract modifications and changes in the transaction price.

2.2.1 Evaluating a customer's right to sell (or pledge) a right to obtain an asset when determining whether the customer controls the asset as it is created or enhanced

We believe that an entity needs to assess control of the asset that the entity's performance creates or enhances, rather than any contractual rights to obtain the completed asset in the future. For example, and as discussed by the IFRS Interpretations Committee (see 2.3.2.F below), in a contract for the sale of real estate that the entity constructs, the asset created is the real estate itself and not the customer's right to obtain the completed real estate in the future. That is, an entity would evaluate whether the customer controls the partially constructed real estate as it is being constructed to determine whether the criterion in paragraph 35(b) of IFRS 15 is met. The customer's right to sell (or pledge) a right to obtain a completed asset in the future is not evidence that the customer controls the asset itself as it is being created or enhanced.⁵

2.3.1 No alternative use

The IASB explained in the Basis for Conclusions that it had developed the notion of ‘alternative use’ to prevent over time revenue recognition when the entity's performance does not transfer control of the goods or services to the customer over time. When the entity's performance creates an asset with an alternative use to the entity (e.g. standard inventory items), the entity can readily direct the asset to another customer. In those cases, the entity (not the customer) controls the asset as it is created because the customer does not have the ability to direct the use of the asset or restrict the entity from directing that asset to another customer. The standard states that an asset created by an entity's performance ‘does not have an alternative use to an entity if the entity is either restricted contractually from readily directing the asset for another use during the creation or enhancement of that asset or limited practically from readily directing the asset in its completed state for another use’. The assessment of whether an asset has an alternative use to the entity is made at contract inception. [IFRS 15.36].

In assessing whether an asset has an alternative use, an entity is required to consider the effects of contractual restrictions and practical limitations on its ability to readily direct that asset for another use (e.g. selling it to a different customer). The standard clarifies that the possibility of the contract with the customer being terminated is not a relevant consideration in this assessment. [IFRS 15.B6].

In making the assessment of whether a good or service has an alternative use, an entity must consider any substantive contractual restrictions. A contractual restriction is substantive if a customer could enforce its rights to the promised asset if the entity sought to direct the asset for another use. [IFRS 15.B7]. Contractual restrictions that are not substantive, such as protective rights for the customer, are not considered. The Board explained in the Basis for Conclusions that a protective right typically gives an entity the practical ability to physically substitute or redirect the asset without the customer's knowledge or objection to the change. For example, a contract may specify that an entity cannot transfer a good to another customer because the customer has legal title to the good. Such a contractual term would not be substantive if the entity could physically substitute that good for another and could redirect the original good to another customer for little cost. In that case, the contractual restriction would merely be a protective right and would not indicate that control of the asset has transferred to the customer. [IFRS 15.BC138]. As an example, the standard notes that contractual restrictions are not substantive if an asset is largely interchangeable with other assets that the entity could transfer to another customer without breaching the contract and without incurring significant costs that otherwise would not have been incurred in relation to that contract. [IFRS 15.B7].

An entity also needs to consider any practical limitations on directing the asset for another use. A significant economic loss could arise because the entity either would incur significant costs to rework the asset or would only be able to sell the asset at a significant loss. For example, an entity may be practically limited from redirecting assets that either have design specifications that are unique to a customer or are located in remote areas. [IFRS 15.B8]. In making this determination, the Board clarified that an entity considers the characteristics of the asset that ultimately will be transferred to the customer and assesses whether the asset in its completed state could be redirected without a significant cost of rework. The Board provided an example of manufacturing contracts in which the basic design of the asset is the same across all contracts, but substantial customisation is made to the asset. As a result, redirecting the finished asset would require significant rework and the asset would not have an alternative use because the entity would incur significant economic losses to direct the asset for another use. [IFRS 15.BC138].

Considering the level of customisation of an asset may help entities assess whether an asset has an alternative use. The IASB noted in the Basis for Conclusions that, when an entity is creating an asset that is highly customised for a particular customer, it is less likely that the entity could use that asset for any other purpose. [IFRS 15.BC135]. That is, it is likely that the entity would need to incur significant rework costs to redirect the asset to another customer or sell the asset at a significantly reduced price. As a result, the asset would not have an alternative use to the entity and the customer could be regarded as receiving the benefit of the entity's performance as the entity performs (i.e. having control of the asset), provided that the entity also has an enforceable right to payment (discussed at 2.3.2 below). However, the Board clarified that although the level of customisation is a factor to consider, but it should not be a determinative factor. For example, in some real estate contracts, the asset may be standardised (i.e. not highly customised), but it still may not have an alternative use to the entity because of substantive contractual restrictions that preclude the entity from readily directing the asset to another customer. [IFRS 15.BC137].

The standard provides the following example to illustrate an evaluation of practical limitations on directing an asset for another use. [IFRS 15.IE73‑IE76].

Requiring an entity to assess contractual restrictions when evaluating this criterion may seem to contradict the requirements in paragraph B4 of IFRS 15 to ignore contractual and practical restrictions when evaluating whether another entity would need to substantially reperform the work the entity has completed to date (see 2.1 above). The Board explained that this difference is appropriate because each criterion provides a different method for assessing when control transfers and the criteria were designed to apply to different situations. [IFRS 15.BC139].

After contract inception, an entity does not update its assessment of whether an asset has an alternative use for any subsequent changes in facts and circumstances, unless the parties approve a contract modification that substantively changes the performance obligation. [IFRS 15.36]. The IASB also decided that an entity's lack of an alternative use for an asset does not, by itself, mean that the customer effectively controls the asset. The entity would also need to determine that it has an enforceable right to payment for performance to date, as discussed at 2.3.2 below. [IFRS 15.BC141].

2.3.2 Enforceable right to payment for performance completed to date

To evaluate whether it has an enforceable right to payment for performance completed to date, the entity is required to consider the terms of the contract and any laws or regulations that relate to it. [IFRS 15.37, B12]. The standard states that the right to payment for performance completed to date need not be for a fixed amount. However, at any time during the contract term, an entity must be entitled to an amount that at least compensates the entity for performance completed to date (as defined in paragraph B9 of IFRS 15), even if the contract is terminated by the customer (or another party) for reasons other than the entity's failure to perform as promised. [IFRS 15.37, B9]. The IASB concluded that a customer's obligation to pay for the entity's performance is an indicator that the customer has obtained benefit from the entity's performance. [IFRS 15.BC142].

The standard clarifies that an amount that would compensate an entity for performance completed to date would be an amount that approximates the selling price of the goods or services transferred to date (e.g. recovery of the costs incurred by an entity in satisfying the performance obligation plus a reasonable profit margin), rather than compensation for only the entity's potential loss of profit if the contract were to be terminated. [IFRS 15.B9].

Compensation for a reasonable profit margin need not equal the profit margin expected if the contract was fulfilled as promised, but the standard states that an entity should be entitled to compensation for either of the following amounts: [IFRS 15.B9]

• a proportion of the expected profit margin in the contract that reasonably reflects the extent of the entity's performance under the contract before termination by the customer (or another party); or
• a reasonable return on the entity's cost of capital for similar contracts (or the entity's typical operating margin for similar contracts) if the contract-specific margin is higher than the return the entity usually generates from similar contracts.

An entity's right to payment for performance completed to date need not be a present unconditional right to payment. In many cases, an entity will have an unconditional right to payment only at an agreed-upon milestone or upon complete satisfaction of the performance obligation. Therefore, when assessing whether it has a right to payment for performance completed to date, an entity is required to consider whether it would have an enforceable right to demand or retain payment for performance completed to date if the contract were to be terminated before completion (for reasons other than the entity's failure to perform as promised). [IFRS 15.B10].

In some contracts, a customer may have a right to terminate the contract only at specified times during the life of the contract or the customer might not have any right to terminate the contract. The standard states that, if a customer acts to terminate a contract without having the right to terminate the contract at that time (including when a customer fails to perform its obligations as promised), the contract (or other laws) might entitle the entity to continue to transfer the promised goods or services in the contract to the customer and require the customer to pay the promised consideration. In those circumstances, an entity has a right to payment for performance completed to date because the entity has a right to continue to perform its obligations in accordance with the contract and to require the customer to perform its obligations (which include paying the promised consideration). [IFRS 15.B11].

The IASB described in the Basis for Conclusions how the factors of ‘no alternative use’ and the ‘right to payment’ relate to the assessment of control. Since an entity is constructing an asset with no alternative use to the entity, the entity is effectively creating an asset at the direction of the customer. That asset would have little or no value to the entity if the customer were to terminate the contract. As a result, the entity will seek economic protection from the risk of customer termination by requiring the customer to pay for the entity's performance to date in the event of customer termination. The customer's obligation to pay for the entity's performance to date (or, the inability to avoid paying for that performance) suggests that the customer has obtained the benefits from the entity's performance. [IFRS 15.BC142].

The enforceable right to payment criterion has two components that an entity must assess:

• the amount that the customer would be required to pay; and
• what it means to have the enforceable right to payment.

The Board provided additional application guidance on how to evaluate each of these components.

Firstly, the Board explained in the Basis for Conclusions that the focus of the analysis should be on the amount to which the entity would be entitled upon termination. [IFRS 15.BC144]. This amount is not the amount the entity would settle for in a negotiation and it does not need to reflect the full contract margin that the entity would earn if the contract were completed. The Board clarified in paragraph B9 of IFRS 15 that a ‘reasonable profit margin’ would either be a proportion of the entity's expected profit margin that reasonably reflects the entity's performance to date or a reasonable return on the entity's cost of capital. In addition, in paragraph B13 of IFRS 15, the standard clarifies that including a payment schedule in a contract does not, in and of itself, indicate that the entity has the right to payment for performance completed to date. This is because, in some cases, the contract may specify that the consideration received from the customer is refundable for reasons other than the entity failing to perform as promised in the contract. The entity must examine information that may contradict the payment schedule and may represent the entity's actual right to payment for performance completed to date. As highlighted in Example 30.5 below, payments from a customer must approximate the selling price of the goods or services transferred to date to be considered a right to payment for performance to date. A fixed payment schedule may not meet this requirement. [IFRS 15.B13].

Secondly, the IASB added application guidance to help an entity assess the existence and enforceability of a right to payment. In making this assessment, entities need to consider any laws, legislation or legal precedent that could supplement or override the contractual terms. More specifically, IFRS 15 states that the assessment includes consideration of:

1. ‘legislation, administrative practice or legal precedent confers upon the entity a right to payment for performance to date even though that right is not specified in the contract with the customer;
2. relevant legal precedent indicates that similar rights to payment for performance completed to date in similar contracts have no binding legal effect; or
3. an entity's customary business practices of choosing not to enforce a right to payment has resulted in the right being rendered unenforceable in that legal environment. However, notwithstanding that an entity may choose to waive its right to payment in similar contracts, an entity would continue to have a right to payment to date if, in the contract with the customer, its right to payment for performance to date remains enforceable.' [IFRS 15.B12].

Furthermore, the standard indicates that an entity may have an enforceable right to payment even when the customer terminates the contract without having the right to terminate. This would be the case if the contract (or other law) entitles the entity to continue to transfer the goods or services promised in the contract and require the customer to pay the consideration promised for those goods or services (often referred to as ‘specific performance’). [IFRS 15.BC145]. The standard also states that even when an entity chooses to waive its right to payment in other similar contracts, an entity would continue to have a right to payment for the contract if, in the contract, its right to payment for performance to date remains enforceable.

The standard provides the following example to illustrate the concepts described at 2.3 above. It depicts an entity providing consulting services that will take the form of a professional opinion upon the completion of the services. In this example, the entity's performance obligation meets the no alternative use and right to payment criterion in paragraph 35(c) of IFRS 15, as follows. [IFRS 15.IE69-IE72].

Example 30.5 below illustrates a contract in which the fixed payment schedule is not expected to correspond, at all times throughout the contract, to the amount that would be necessary to compensate the entity for performance completed to date. Accordingly, the entity concludes that it does not have an enforceable right to payment for performance completed to date as follows. [IFRS 15.IE77-IE80].

Example 30.6 below contrasts similar situations and illustrates when revenue would be recognised over time (see 2 above) versus at a point in time (see 4 below). Specifically, this example illustrates the evaluation of the ‘no alternative use’ and ‘right to payment for performance to date’ concepts, as follows. [IFRS 15.IE81-IE90].

3.1.1 Practical expedient for measuring progress towards satisfaction of a performance obligation

The Board provided a practical expedient in paragraph B16 of IFRS 15 for an entity that is using an output method to measure progress towards completion of a performance obligation that is satisfied over time. The practical expedient only applies if an entity can demonstrate that the invoiced amount corresponds directly with the value to the customer of the entity's performance completed to date. [IFRS 15.B16]. In that situation, the practical expedient allows an entity to recognise revenue in the amount for which it has the right to invoice (i.e. the ‘right to invoice’ practical expedient). An entity may be able to use this practical expedient for a service contract in which an entity bills a fixed amount for each hour of service provided.

A TRG agenda paper noted that paragraph B16 of IFRS 15 is intended as an expedient to some aspects of Step 3, Step 4 and Step 5 in the standard. Because this practical expedient allows an entity to recognise revenue on the basis of invoicing, revenue is recognised by multiplying the price (assigned to the goods or services delivered) by the measure of progress (i.e. the quantities or units transferred). Therefore, an entity effectively bypasses the steps in the model for determining the transaction price, allocating that transaction price to the performance obligations and determining when to recognise revenue. However, it does not permit an entity to bypass the requirements for identifying the performance obligations in the contract and evaluating whether the performance obligation is satisfied over time, which is a requirement to use this expedient.¹⁴

To apply the practical expedient, an entity must also be able to assert that the right to consideration from a customer corresponds directly with the value to the customer of the entity's performance to date. When determining whether the amount that has been invoiced to the customer corresponds directly with the value to the customer of an entity's performance completed to date, the entity could evaluate the amount that has been invoiced in comparison to market prices, stand-alone selling prices or another reasonable measure of value to the customer. See 3.4.5 below for the TRG discussion on evaluating value to the customer in contracts with changing rates.

Furthermore, the TRG members also noted in their discussion of the TRG agenda paper that an entity would have to evaluate all significant upfront payments or retrospective adjustments (e.g. accumulating rebates) in order to determine whether the amount the entity has a right to invoice for each good or service corresponds directly to the value to the customer of the entity's performance completed to date. That is, if an upfront payment or retrospective adjustment significantly shifts payment for value to the customer to the front or back-end of a contract, it may be difficult for an entity to conclude that the amount invoiced corresponds directly with the value provided to the customer for goods or services.¹⁵

The TRG agenda paper also stated that the presence of an agreed-upon customer payment schedule does not mean that the amount an entity has the right to invoice corresponds directly with the value to the customer of the entity's performance completed to date. In addition, the TRG agenda paper stated that the existence of specified contract minimums (or volume discounts) would not always preclude the application of the practical expedient, provided that these clauses are deemed non-substantive (e.g. the entity expects to receive amounts in excess of the specified minimums).¹⁶

3.2.1 Adjustments to the measure of progress based on an input method

If an entity applies an input method that uses costs incurred to measure its progress towards completion (e.g. cost to cost), the cost incurred may not always be proportionate to the entity's progress in satisfying the performance obligation. To address this shortcoming of input methods, the standard notes that a shortcoming of input methods is that there may not be a direct relationship between an entity's inputs and the transfer of control of goods or services to a customer. Therefore, an entity is required to exclude the effects of any inputs that do not depict the entity's performance (in transferring control of goods or services to the customer) from an input method. For instance, when using a cost-based input method, the standard suggests an adjustment to the measure of progress may be required in the following circumstances: [IFRS 15.B19]

1. When a cost incurred does not contribute to an entity's progress in satisfying the performance obligation.

   As an example, the standard states that an entity would not recognise revenue on the basis of costs incurred that are attributable to significant inefficiencies in the entity's performance that were not reflected in the price of the contract (e.g. the costs of unexpected amounts of wasted materials, labour or other resources that were incurred to satisfy the performance obligation).

2. When a cost incurred is not proportionate to the entity's progress in satisfying the performance obligation.

   In those circumstances, the standard states that the best depiction of the entity's performance may be to adjust the input method to recognise revenue only to the extent of that cost incurred. For example, a faithful depiction of an entity's performance might be to recognise revenue at an amount equal to the cost of a good used to satisfy a performance obligation if the entity expects at contract inception that all of the following conditions would be met:

   1. the good is not distinct;
   2. the customer is expected to obtain control of the good significantly before receiving services related to the good;
   3. the cost of the transferred good is significant relative to the total expected costs to completely satisfy the performance obligation; and
   4. the entity procures the good from a third party and is not significantly involved in designing and manufacturing the good (but the entity is acting as a principal, see Chapter 28 at 3.4).

In a combined performance obligation comprised of non-distinct goods or services, the customer may obtain control of some of the goods before the entity provides the services related to those goods. This could be the case when goods are delivered to a customer site, but the entity has not yet integrated the goods into the overall project (e.g. the materials are ‘uninstalled’). The Board concluded that, if an entity were using a percentage-of-completion method based on costs incurred to measure its progress (i.e. cost-to-cost), the measure of progress may be inappropriately affected by the delivery of these goods and that a pure application of such a measure of progress would result in overstated revenue. [IFRS 15.BC171].

Paragraph B19 of IFRS 15 indicates that, in such circumstances, (e.g. when control of the individual goods has transferred to the customer, but the integration service has not yet occurred), the best depiction of the entity's performance may be to recognise revenue at an amount equal to the cost of the goods used to satisfy the performance obligation (i.e. a zero margin). This is because the costs incurred are not proportionate to an entity's progress in satisfying the performance obligation. It is also important to note that determining when control of the individual goods (that are part of a performance obligation) have transferred to the customer requires judgement. [IFRS 15.B19].

The Board noted that the adjustment to the cost-to-cost measure of progress for uninstalled materials is generally intended to apply to a subset of construction-type goods that have a significant cost relative to the contract and for which the entity is effectively providing a simple procurement service to the customer. [IFRS 15.BC172]. By applying the adjustment to recognise revenue at an amount equal to the cost of uninstalled materials, an entity is recognising a margin similar to the one the entity would have recognised if the customer had supplied the materials. The IASB clarified that the outcome of recognising no margin for uninstalled materials is necessary to adjust the cost-to-cost calculation to faithfully depict an entity's performance. [IFRS 15.BC174].

In addition, situations may arise in which not all of the costs incurred contribute to the entity's progress in completing the performance obligation. Paragraph B19(a) of IFRS 15 requires that, under an input method, an entity exclude these types of costs (e.g. costs related to significant inefficiencies, wasted materials, required rework) from the measure of progress, unless such costs were reflected in the price of the contract. [IFRS 15.B19(a)].

The standard includes the following example, illustrating how uninstalled materials are considered in measuring progress towards complete satisfaction of a performance obligation. [IFRS 15.IE95-IE100].

The entity uses an input method based on costs incurred to measure its progress towards complete satisfaction of the performance obligation. The entity assesses whether the costs incurred to procure the elevators are proportionate to the entity's progress in satisfying the performance obligation, in accordance with paragraph B19 of IFRS 15. The customer obtains control of the elevators when they are delivered to the site in December 20X2, although the elevators will not be installed until June 20X3. The costs to procure the elevators ($1.5 million) are significant relative to the total expected costs to completely satisfy the performance obligation ($4 million). The entity is not involved in designing or manufacturing the elevators.

The entity concludes that including the costs to procure the elevators in the measure of progress would overstate the extent of the entity's performance. Consequently, in accordance with paragraph B19 of IFRS 15, the entity adjusts its measure of progress to exclude the costs to procure the elevators from the measure of costs incurred and from the transaction price. The entity recognises revenue for the transfer of the elevators in an amount equal to the costs to procure the elevators (i.e. at a zero margin).

As at 31 December 20X2 the entity observes that:

1. (a) other costs incurred (excluding elevators) are $500,000; and
2. (b) performance is 20 per cent complete (i.e. $500,000 ÷ $2,500,000).

Consequently, at 31 December 20X2, the entity recognises the following:

(a) Revenue recognised is calculated as (20 per cent × $3,500,000) + $1,500,000. ($3,500,000 is $5,000,000 transaction price – $1,500,000 costs of elevators).

(b) Cost of goods sold is $500,000 of costs incurred + $1,500,000 costs of elevators.

When costs for uninstalled materials are excluded from the measure of progress and those materials are subsequently installed, an entity will need to apply significant judgement, based on its assessment of which treatment best depicts its performance in the contract, to determine whether the costs should be: (a) included in the measure of progress upon installation; or (b) excluded from the measure of progress for the duration of the contract.

• Approach (a) − once the materials have been installed, the costs for those materials are included in the measure of progress

  Paragraph B19(b) of IFRS 15 can be read to apply only while materials are uninstalled. Once installed, it no longer applies to the materials and the entity reverts to the general requirements for measuring progress over time. The Basis for Conclusions indicates that recognising the profit margin for the performance obligation as a whole before the goods are installed could result in overstated revenue, and that paragraph B19(b) of IFRS 15 applies to uninstalled materials and that it is only those materials that are not yet installed that attract a zero margin. [IFRS 15.BC171, BC172, BC174]. Furthermore, Example 19 of IFRS 15 (included as Example 30.9 above) illustrates the accounting for materials before they are installed (at the point in time that control of those materials has passed to the customer) and not after being installed.

  When the profit margin applicable to the procured item(s) differs significantly from the profit margin attributable to other goods and services to be provided in accordance with the contract, the application of the profit margin for the performance obligation as a whole may overstate the amount of revenue and profit that is attributed to the procured item(s). Entities will need to consider whether the outcome of applying this approach is consistent with the underlying principle in paragraph 39 of IFRS 15, that the amount of revenue recognised depict its performance, as it satisfies its performance obligation.

  If this approach is used, an entity needs to ensure it does not use a profit margin that differs from the profit margin for the performance obligation as a whole. That is, it should not attribute different profit margins to each component within a single performance obligation. This would effectively treat each component as a separate performance obligation when they are not distinct (and, therefore, inappropriately bypass the requirements for identifying performance obligations). [IFRS 15.BC171].

• Approach (b) − the costs for uninstalled materials are excluded from the measure of progress for the duration of the contract

  Paragraph B19(b) of IFRS 15 does not distinguish goods that have been installed from those that have not yet been installed and the adjustments to the measure of progress in Example 19 of IFRS 15 (included as Example 30.9 above) can be read to apply for the duration of the contract. [IFRS 15.IE98]. As discussed above, paragraph B19(b) of IFRS 15 is generally intended to apply to a subset of construction-type goods that have a significant cost relative to the contract and for which the entity is effectively providing a simple procurement service to the customer or if the customer had supplied the materials themselves. [IFRS 15.BC172].

  Approach (b) shifts the margin from uninstalled materials to the other components within the single performance obligation, which is recognised as the related costs are incurred (and included in the measure of progress). Entities may need to consider whether this reflects their performance if they typically charge a margin for procurement of similar materials.

3.4.1 Measuring progress toward satisfaction of a stand-ready obligation that is satisfied over time

At the January 2015 TRG meeting, the TRG members discussed questions raised regarding how an entity would measure progress for a stand-ready obligation that is a performance obligation satisfied over time.

The TRG members generally agreed that an entity should not default to a straight-line revenue attribution model. However, they also generally agreed that if an entity expects the customer to receive and consume the benefits of its promise throughout the contract period, a time-based measure of progress (e.g. straight-line) would be appropriate. The TRG agenda paper noted that this is generally the case for unspecified upgrade rights, help-desk support contracts and cable or satellite television contracts. The TRG members generally agreed that rateable recognition may not be appropriate if the benefits are not spread evenly over the contract period (e.g. an annual snow removal contract that provides most benefits in winter).¹⁷

See Chapter 28 at 3.1.1.C for a discussion on whether contracts with a stand-ready element include a single performance obligation that is satisfied over time.

3.4.2 Selecting a measure of progress when there is more than one promised good or service within a performance obligation

In July 2015, the TRG members were asked to consider whether an entity can use more than one measure of progress in order to depict an entity's performance in transferring a performance obligation comprised of two or more goods and/or services that is satisfied over time. Note that, under Step 2 of the new model, a single performance obligation may contain multiple non-distinct goods or services and/or distinct goods or services that were required to be combined with non-distinct goods or services in order to identify a distinct bundle. This bundled performance obligation is referred to as a ‘combined performance obligation’ for the purpose of this discussion.

The TRG members agreed that when an entity has determined that a combined performance obligation is satisfied over time, the entity has to select a single measure of progress that faithfully depicts the entity's performance in transferring the goods or services. For example, using different measures of progress for different non-distinct goods or services in the combined performance obligation would be inappropriate because doing so ignores the unit of account that has been identified under the standard (i.e. the single combined performance obligation). Furthermore, it would also be inappropriate because the entity would recognise revenue in a way that overrides the separation and allocation requirements in the standard. [IFRS 15.BC161].

The TRG agenda paper noted that a single method of measuring progress should not be broadly interpreted to mean an entity may apply multiple measures of progress as long as all measures used are either output or input measures.¹⁸

3.4.3 Determining the appropriate single measure of progress for a combined performance obligation that is satisfied over time

At the July 2015 TRG meeting, the TRG members discussed how an entity would determine the appropriate single measure of progress for a combined performance obligation that is satisfied over time.

The TRG members acknowledged that it may be difficult to appropriately determine a single measure of progress when the entity transfers goods or services that make up the combined performance obligation over different points of time and/or the entity would otherwise use a different measure of progress (e.g. a time-based method versus a labour-based input method) if each promise was a separate performance obligation. Such a determination requires significant judgement, but the TRG members generally agreed that the measure of progress selected is not meant to be a ‘free choice’. Entities need to consider the nature of the overall promise for the combined performance obligation in determining the measure of progress to use. For example, entities should not default to a ‘final deliverable’ methodology such that all revenue would be recognised over the performance period of the last promised good or service. Rather, an entity is required to select the single measure of progress that most faithfully depicts the entity's performance in satisfying its combined performance obligation.¹⁹

Some of the TRG members observed that an entity would need to consider the reasons why goods or services were bundled into a combined performance obligation in order to determine the appropriate pattern of revenue recognition. For example, if a good or service was combined with other goods or services because it was not capable of being distinct, that may indicate that it does not provide value or use to the customer on its own. As such, the entity would not contemplate the transfer of that good or service when determining the pattern of revenue recognition for the combined performance obligation.

The TRG members also generally agreed that, if an appropriately selected single measure of progress does not faithfully depict the economics of the arrangement, the entity should challenge whether the performance obligation was correctly combined (i.e. there may be more than one performance obligation).

3.4.4 Can control of a good or service underlying a performance obligation satisfied over time be transferred at discrete points in time?

The FASB TRG members generally agreed that, if a performance obligation meets the criteria for revenue to be recognised over time (rather than at a point in time), control of the underlying good or service is not transferred at discrete points in time. Because control transfers as an entity performs, an entity's performance (as reflected using an appropriate measure of progress) should not result in the creation of a material asset in the entity's accounts (e.g. work in progress).

Stakeholders had queried whether control of a good or service underlying a performance obligation that is satisfied over time can be transferred at discrete points in time because the standard highlights several output methods, including ‘milestones reached’, as potentially acceptable methods for measuring progress towards satisfaction of an over-time performance obligation. The FASB TRG members generally agreed that an entity could use an output method only if that measure of progress correlates to the entity's performance to date.²⁰

At the May 2016 IASB meeting, the IASB staff indicated support for the conclusions reached in the TRG agenda paper on this issue, noting that it provides some clarity about when to use milestones reached as a measure of progress. Furthermore, the members of the IASB who observed the FASB TRG meeting indicated that the FASB TRG discussion on the topic was helpful.

3.4.5 Use of the ‘right to invoice’ practical expedient for a contract that includes rates that change over the contractual term

At the July 2015 TRG meeting, the TRG members were asked to consider whether the ‘right to invoice’ practical expedient could apply to a contract that includes rates that change over the contractual term.

The TRG members generally agreed that determining whether an entity can apply the ‘right to invoice’ practical expedient requires judgement. They also generally agreed that it is possible for entities to meet the requirements for the practical expedient in contracts with changing rates, provided that the changes in rates correspond directly to changes in value to the customer. That is, a contract does not need to have a fixed price per unit for the duration of a contract in order to qualify for the practical expedient. Examples of contracts that might qualify include an IT outsourcing arrangement with rates that decrease over the contract term as the level of effort to the customer decreases or a multi-year electricity contract that contemplates the forward market price of electricity. However, the SEC staff observer also noted that entities need to have strong evidence that variable prices reflect the value to the customer in order to recognise variable amounts of revenue for similar goods or services.²¹

See Chapter 32 at 3.2.1.D for a discussion on whether an entity can still use the practical expedient (under which an entity can decide not to disclose the amount of transaction price allocated to remaining performance obligation) if it determines that it has not met the criteria to use the ‘right to invoice’ practical expedient (e.g. because there is a substantive contractual minimum payment or a volume discount).

3.4.6 Recognising revenue when fulfilment costs are incurred prior to the contract establishment date for a specifically anticipated contract

An entity cannot begin to recognise revenue on a contract until it meets all five criteria to be considered a contract under IFRS 15 (as discussed in Chapter 28 at 2.1), regardless of whether it has received any consideration or has begun performing under the terms of the arrangement.

At the March 2015 TRG meeting, the TRG members were asked to consider how an entity would recognise revenue at the date a contract exists if an entity begins activities on a specifically anticipated contract either:

• before it agrees to the contract with the customer; or
• before the arrangement meets the criteria to be considered a contract under the standard.²²

The TRG members generally agreed that if the goods or services that ultimately will be transferred meet the criteria to be recognised over time, revenue would be recognised on a cumulative catch-up basis at the ‘contract establishment date’, reflecting the performance obligation(s) that are partially or fully satisfied at that time. The TRG agenda paper noted that the cumulative catch-up method is considered to be consistent with the overall principle of the standard that revenue is recognised when (or as) an entity transfers control of goods or services to a customer.²³

See Chapter 31 at 5.2.2 for the TRG members' discussion regarding contract fulfilment costs incurred prior to the contract establishment date.

5.1.1 Conditional call options to repurchase an asset

The standard does not specifically address conditional call options. We believe that if the entity controls the outcome of the condition that causes the call option to become active, then the presence of the call option indicates that control has not transferred because the customer is limited in its ability to direct the use of and obtain substantially all of the remaining benefits from the asset. That is, the entity would be required to treat the contract as a lease or a financing arrangement as required by paragraph B66 of IFRS 15.

We also believe that if the entity does not control the condition that causes the call option to become active, then it would be acceptable for the entity to apply judgement to determine whether the call option limits the customer's ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. For example, if neither the entity nor the customer controls the outcome of the contingency, the entity could evaluate the nature of the contingency, together with the likelihood of the contingency becoming active, to determine whether it limits the customer's ability to obtain control of the asset.

Furthermore, we believe that if the customer controls the outcome of the contingency, then the conditional call option may not prevent the customer from obtaining controlling of the asset if the customer can direct the use of, and obtain substantially all the remaining benefits from, the asset. The application guidance in paragraphs B70-B76 of IFRS 15 may be helpful for an entity to consider when determining whether the customer obtains control of the asset when a customer controls the outcome of the contingency.

In the case of perishable products, we believe that an entity's conditional right to remove and replace expired goods does not necessarily constrain the customer's ability to direct the use of and obtain substantially all of the remaining benefits from the products. That is, the entity is not able to remove and replace the products until they expire. Furthermore, the customer has control of the products over their entire useful life. Consequently, it may be reasonable for an entity to conclude that control of the initial product does transfer to the customer in this situation and that an entity could consider this right to be a form of a right of return (see Chapter 29 at 2.4).