IFRS 15 Customer options for additional goods or services

Customer options for additional goods or services

In short – An entity accounts for a customer option to acquire additional goods or services as a performance obligation if the option provides the customer with a material right. The standard provides guidance on calculating the stand-alone selling price of a customer option when it is a material right.

When an entity grants the customer an option to acquire additional goods or services, that option is a performance obligation under the contract if it provides a material right that the customer would not receive without entering into that contract. (IFRS 15.B40)

The following decision tree helps analyse whether a customer option is a performance obligation. (IFRS 15.B40-B41)

Additional goods or services

If the stand-alone selling price for a customer’s option to acquire additional goods or services that is a material right is not directly observable, then an entity will need to estimate it. This estimate reflects the discount that the customer would obtain when exercising the option, adjusted for:

  • any discount that the customer would receive without exercising the option; and
  • the likelihood that the option will be exercised. (IFRS 15.B42)

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IFRS 15 Practical alternative for similar goods or services

Practical alternative for similar goods or services

If the goods or services that the customer has a material right to acquire are similar to the original goods or services in the contract – e.g. when the customer has an option to renew the contract – then an entity may allocate the transaction price to the optional goods or services with reference to the goods or services expected to be provided and the corresponding consideration expected to be received. (IFRS 15.B43)

Case – Applying the practical alternative

Company B enters into a contract with Customer C to transfer two units of Product P for 2,000 (1,000 per unit, which is the stand-alone selling price) with an option to purchase up to two more units of P at 500 per unit (i.e. 50% discount). B concludes that each unit of P is distinct and satisfied at a point in time.

B concludes that the option for up to two additional units of P is a material right because the discount is incrementalsimilar goods or services to discounts provided to other customers in this class of customers and does not exist independently from the current contract. B also concludes that the stand-alone selling price for the two additional units of P is 1,000.

The options allow C to acquire additional units of P, which are the same as the goods purchased in the original contract, and the purchases would be made in accordance with the original terms of the contract; therefore, B uses the alternative approach to allocate the transaction price to the options.

B expects that there is a high likelihood of the customer exercising each option because of the significant discount provided. As such, B does not expect breakage and includes all of the options in the expected number of goods that it expects to provide. Therefore, B allocates the expected transaction price to the units expected to be transferred.

Expected transaction price

Therefore, in effect 1,500 of the total consideration in the original contract of 2,000 is allocated to the purchase of the original two units and the remaining 500 is allocated to the two options.

Alternative approach not limited to renewal options

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Recognition of revenue as principal or agent in IFRS 15

Recognition of revenue as principal or agent

That is a big question under IFRS 15. Recognise a large amount of revenue as a principal or only a fraction of that turnover as an agent. So the stakes are high!!

Royalty payments

Entity A has agreed to pay a royalty to Entity B for the use of intellectual property rights that Entity A requires to make sales to its customers. The royalty is specified as a percentage of gross proceeds from Entity A’s sales to its customers less contractually defined costs. Entity A is the principal in the sales transactions with its customers (i.e. it must provide the goods and services itself and does not act as an agent for Entity B).

The question is: In Entity A’s financial statements, should the royalty payments be netted against revenue or recognised as a cost of fulfilling the contract?

Because Entity A is the principal in respect of the sales to its customers, it should recognise its revenue on a gross basis and the royalty as a cost of fulfilling the contract. Guidance on the appropriate accounting for the costs of fulfilling a contract, including whether such costs should be capitalised or expensed, is provided in IFRS 15 95 – 104.

Principal versus agent

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Non-refundable upfront fees

Non-refundable upfront fees

In short – Some contracts include non-refundable upfront fees that are paid at or near contract inception – e.g. joining fees for health club membership, activation fees for telecommunication contracts and set-up fees for outsourcing contracts. The standard provides guidance on determining the timing of recognition for these fees.

An entity assesses whether the non-refundable upfront fee relates to the transfer of a promised good or service to the customer. (IFRS 15.B40, B48–B51)

In many cases, even though a non-refundable upfront fee relates to an activity that the entity is required to undertake to fulfil the contract, that activity does not result in the transfer of a promised good or service to the customer. Instead, it is an administrative task. For further discussion on identifying performance obligations, use this link.

If the activity does not result in the transfer of a promised good or service to the customer, then the upfront fee is an advance payment for performance obligations to be satisfied in the future and is recognised as revenue when those future goods or services are provided.

If the upfront fee gives rise to a material right for future goods or services, then the entity attributes all of it to the goods and services to be transferred, including the material right associated with the upfront payment. For further discussion on allocating the transaction price and customer options, use this link and this link, respectively.

The non-refundable upfront fee results in a contract that includes a customer option that is a material right if it would probably impact the customer’s decision on whether to exercise the option to continue buying the entity’s product or service (e.g. to renew a membership or service contract or order an additional product). (IFRS 15.BC387)

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Subsidiary as defined in IFRS 10


A subsidiary is an entity that is controlled by another entity.

So a subsidiary is an investment by an entity (the parent) in an other entity (investee or subsidiary). But there are also other investments entities can invest in……..

In IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosures of interest in other entities all these types of investments are explained.

Here is a summary guidance relating to investments in subsidiaries in consolidated accounts and as a start a short summary of all of the types of investments to put into perspective investments in subsidiaries.

All of the types of investments by entities

The leading principle in classifying all of the types of investments is summarised in this illustration (the yellow boxes refer to classifications arrived at through the green decision boxes):


IFRS 9 Equity instrument

The ownership of less than 20% creates an investment position carried at historic cost or fair value in the owning entity’s balance sheet.

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Liability definition

Liability definition

The current liability definition is that a liability of an entity is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

For years the IASB is working on a revision of this definition in the project Review of the Conceptual Framework, because of perceived problems with existing definitions and recognition criteria for assets and liabilities.

Asset definition

The current asset definition is that an asset of an entity is a resource controlled by the entity, as a result of past events, from which future economic benefits are expected to flow to the entity.

These two definitions proved useful tool for many years but for some problems (refer to the two definitions above):

  • Confusion on which is the asset or liability?
    • the resource vs inflows of economic benefits that the resource may generate
    • the obligation vs outflows of economic benefits that the obligation may generate
  • What is the role of uncertainty?

Suggested revised Conceptual Framework definitions

The liability definition is that a liability of an entity is a present obligation of the entity to transfer an economic resource as a result of past events.

The asset definition is that an asset of an entity is a present economic resource controlled by the entity as a result of past events.

An economic resource = a right, or other source of value, that is capable of producing economic benefits

Guidance on terms

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IFRS 15 Consumer products revenue accounting – Complete best read

IFRS 15 Consumer products

IFRS 15 Production revenue comprises:

  • Product sales from consumer products companies to retailers, see below
  • Contractual arrangements between consumer products companies and retailers other than product sales, read it here, and
  • Transactions between end-customers and consumer products companies, read it here.

Cases are used to detail these different types of sales/distribution channels to retailers, other product sales and directly to end-consumers and explain their recording under IFRS 15 Revenue from contracts with customers.

Product sales from consumer products companies to retailers

Case – Transfer of control

CosmeticsCo, a consumer products company, uses a CostCo a supermarket chain, to supply its products to the end-customers.

CostCo receives legal title and is required to pay for the products on receipt.

CostCo has no right of return to CosmeticsCo.

When does the consumer products company recognise revenue in accordance with IFRS 15?

The rules

IFRS 15.31: “an entity shall recognize revenue when the entity satisfies the performance obligation by transferring a promised good or service (that is, an asset) to a customer. An asset is transferred when the customer obtains control of that asset.”

IFRS 15.33: “ Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset. The benefits of an asset are the potential cash flows (inflows or savings in outflows) that can be obtained directly or indirectly in many ways.”

IFRS 15.38 requires an entity to consider indicators of the transfer of control, which include, but are not limited to, the IFRS 15 Consumer productsfollowing:

  1. “the customer has a present right to payment……
  2. the customer has legal title to the asset……
  3. the customer has obtained physical possession of the asset…
  4. the customer has the significant risks and rewards of ownership…..
  5. the customer has accepted the asset…..”

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IFRS 15 Revenue accounting examples – Broad and best learned

IFRS 15 Revenue accounting examples

IFRS 15 Revenue accounting examples provides some special examples for IFRS 15 Revenue from contracts with customers:

  • Sales of goods by agents,
  • Concession outlet within a department store, and
  • Excise taxes and duties

IFRS 15 Sales of goods by agents

WebCo operates a website that sells the wine produced by a selection of vineyards.

WebCo enters into a contract with VinyardCo to sell VinyardCo’s wine on line.

WebCo’s website facilitates payments between VinyardCo and the customer.

The sales price is established by VinyardCo and WebCo earns a commission equal to 5% of the sales price.

VinyardCo ships the bottles directly to the customer and insures for loss/damage during shipment.

Legal title is transferred from VinyardCo to WebCo when bottles are leaving VinyardCos warehouse.

The customer returns the bottles to WebCo if they are dissatisfied.

WebCo has the right to return bottles to VinyardCo without penalty if they are returned by the customer.

IFRS 15 Sales of goods by agents

Is WebCo the principal or agent for the sale of wine to the customer?

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IFRS 15 Technology sector revenue recognition – Top read

IFRS 15 Technology sector

The technology industry comprises numerous sub-sectors, including, but not limited to, computers and networking, semiconductors, financial technology, software and internet, the internet of things, health technology, and clean technology. Each sub-sector has diverse product and service offerings and various revenue recognition issues.

Determining how to allocate consideration among elements of an arrangement and when to recognize revenue can be extremely complex and, as a result, industry-specific revenue recognition models were previously developed. IFRS 15 replaces these multiple sets of guidance with a single revenue recognition model, regardless of industry.

While the new standards (ASC 606 and IFRS 15) include a number of specific factors to consider, they are principles–based standards. Accordingly, entities should ensure that revenue recognition is ultimately consistent with the Consolidation exceptions and exemptionssubstance of the arrangement.

Since the issuance of the original standards in 2014, both the FASB and IASB issued amendments. Certain amendments, which may differ between US GAAP and IFRS, impact the technology industry.

The amendments to identifying performance obligations clarify the guidance regarding whether a good or service is separately identifiable from other promises in the contract.

This narrative summarizes some of the areas within the technology industry, broken down following the 5-steps of the IFRS 15 model, that may be significantly affected by IFRS 15s. It also highlights differences between the US GAAP and IFRS guidance. The standards are largely converged.

1. Identify the contract

Generally, any agreement with a customer that creates legally-enforceable rights and obligations meets the definition of a contract. Legal enforceability depends on the interpretation of the law and could vary across legal jurisdictions where the rights of the parties are not enforced in the same way.

Technology companies should consider any history of entering into amendments or side agreements to a contract that either change the terms of, or add to, the rights and obligations of a contract. These can be verbal or written, and could include cancellation, termination or other provisions.

They could also provide customers with options or discounts, or change the substance of the arrangement. All of these have implications for revenue recognition. Therefore, understanding the entire contract, including any amendments, is important to the accounting conclusion.

As part of identifying the contract, entities are required to assess whether collection of the consideration is probable, which is generally interpreted as a 75-80% likelihood in US GAAP and a greater than 50% likelihood in IFRS. This assessment is made after considering any price concessions expected to be provided to the customer.

In other words, price concessions are variable consideration (which affects the transaction price), rather than a factor to consider in assessing collectability.

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IFRS 15 Retail – the finest perfect examples

IFRS 15 Retail revenue – finest perfect examples

Retail is the process of selling consumer goods or services to customers through multiple channels of distribution to earn a profit. Retailers satisfy demand identified through a supply chain. The term “retailer” is typically applied where a service provider fills the small orders of many individuals, who are end-users, rather than large orders of a small number of wholesale, corporate or government clientele. (Source: Wikipedia)

So what is the IFRS 15 guidance for retail?

Here are the cases covering the most significant accounting topics for retail in IFRS 15.

Case – Customer incentives Buy three, get coupon for one free

Death By Chocolate Ltd, a high street chain, is offering a promotion whereby a customer who purchases three boxes of chocolates at €20 per box in a single transaction in a store receives an offer for one free box of chocolates if the customer fills out a request form and mails it to them before a set expiration date.

Death By Chocolate estimates, based on recent experience with similar promotions, that 80% of the customers will complete the mail in rebate required to receive the free box of chocolates.

How is a ‘buy three, get one free’ transaction accounted for and presented by Death By Chocolate?

The rules

IFRS 15.22 states: “At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer either:IFRS 15 Retail

  1. a good or service (or a bundle of goods or services) that is distinct; or
  2. a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer (see paragraph 23).”

IFRS 15.26 provides examples of distinct goods and services, including “granting options to purchase additional goods or services (when those options provide a customer with a material right, as described in paragraphs B39-B43)”.

IFRS 15.B40: “If , in a contract, an entity grants a customer the option to acquire additional goods or services, that option gives rise to a performance obligation in the contract only if the option provides a material right to the customer that it would not receive without entering into that contract (for example, a discount that is incremental to the range of discounts typically given for those goods or services to that class of customer in that geographical area or market).

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