Arrangements with multiple parties

Arrangements with multiple parties – Identifying the customer can be more challenging when there are multiple parties involved in a transaction. The analysis should include understanding the substance of the relationship of all parties involved in the transaction. Arrangements with multiple parties

Arrangements with three or more parties, particularly if there are separate contracts with each of the parties, require judgment to evaluate the substance of those relationships. Management will need to assess which parties are customers and whether the contracts meet the criteria to be combined when applying the guidance in IFRS 15.

An entity needs to assess whether it is the principal or an agent in an arrangement that involves multiple parties. Has the entity promised to provide the specified good Arrangements with multiple partiesor service itself (so the entity’s role is act as the principal) or to arrange for those specified goods or services to be provide by another party (so the entity’s role is act as the agent)? Arrangements with multiple parties

This is because an entity will recognize revenue for the gross amount of consideration it expects to be entitled to when it is the principal, but only the net amount of consideration that it expects to retain after paying the other party for the goods or services provided by that party when it is the agent.

An entity also needs to identify which party is its customer in a transaction with multiple parties in order to determine whether payments made to any of the parties meet the definition of ‘consideration payable to a customer‘ under IFRS 15.

Something else -   Business combination

In many transactions, a customer is easily identifiable. However, in transactions involving multiple parties, it may be less clear which counterparties are customers of the entity. For some arrangements, multiple parties could all be considered customers of the entity. However, for other arrangements, only some of the parties involved are considered customers.

In certain transactions, a counterparty may not always be a ‘customer’ of the entity but a collaborator or partner that shares in the risks and benefits of developing a product to be marketed. This is common in the pharmaceutical, bio-technology, oil and gas, and health care industries. Arrangements with multiple parties

Arrangements with multiple parties – Customer options — loyalty points redeemable by multiple parties – Retailer offers a customer loyalty program in partnership with Hotel whereby Retailer awards one customer loyalty point for each dollar a customer spends on goods purchased from Retailer. Program members can redeem the points for accommodation with Hotel or discounts on future purchases with Retailer. The transaction price allocated to each point based on its relative estimated standalone selling price is $.01.

Retailer sells goods totaling $1 million and grants one million points during the period. Retailer allocates $10,000 of the transaction price to the points, calculated as the number of points issued (one million) multiplied by the allocated transaction price per point ($0.01). Retailer concludes that it has not satisfied its performance obligation as it must stand ready to transfer goods or services if the customer elects not to redeem points with Hotel.Discount rates

How should Retailer account for points issued to its customers?

Something else -   Identify the performance obligations in the contract

Analysis Arrangements with multiple parties
Retailer should not recognize revenue for the $10,000 allocated to the points when they are issued as it has not satisfied its performance obligation. Retailer should recognize revenue upon redemption of the points by the customer with Retailer, when the obligation is transferred to Hotel, or when the points expire. Retailer will need to assess whether it is the principal or an agent in the arrangement if the customer elects to redeem the points with Hotel.

Arrangements with multiple parties – Primary responsibility for fulfilling the contract – The terms of the agreement and other information communicated to the customer (for example, marketing materials) often provide evidence of which party is primarily responsible for fulfilling the obligations in the contract. Management should consider who the customer views as primarily responsible for fulfilling the contract, including which entity will be providing customer support, resolving customer complaints, and accepting responsibility for the quality or suitability of the product or service.

Multiple parties in an arrangement could share responsibility for fulfillment in some circumstances. For example, one party could be responsible for providing the underlying good or service while another party is responsible for the acceptability of the good or service. This indicator might provide less persuasive evidence in these instances. Management should consider the overall principle of control and the other indicators to make its assessment in those cases.

Arrangements with multiple parties

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