Service or insurance contract?

Some contracts meet the definition of an insurance contract but their primary purpose is to provide services for a fixed fee. An entity issuing such contracts may choose to apply IFRS 15 to them if, and only if all of the following conditions are met:

Identification of Fixed fee contracts for services:

All of the following three conditions apply to a fixed fee contract for services:… Continue reading

Example of a significant financing component in a sales contract

This is an example of the workings of IFRS 15.60 – 64.

A vendor enters into a contract with a customer to build and supply a new machine. Control over the completed machine will pass to the customer in two years’ time (the vendor’s performance obligation will be satisfied at a point in time). The contract contains two payment options. Either the customer can pay CU 5 million in two years’ time when it obtains control of the machine, or … Continue reading

Options to purchase additional goods or services

Contracts frequently include options for customers to purchase additional goods or services in the future. Customer options that provide a customer (such as a free or discounted good or service) give rise to a separate performance obligation. In this case, the performance obligation is the option itself, rather than the underlying goods or services. Management will allocate a portion of the transaction price to such options, and recognize Continue reading

Promises in a contract

Promises in a contract can be explicit, or implicit if the promises create a valid expectation that the entity will provide a good or service based on the entity’s customary business practices, published policies, or specific statements. It is therefore important to understand an entity’s policies and practices, representations made during contract negotiations, marketing materials, and business strategies when identifying the promises in an arrangement.… Continue reading

Assessing collectibility for a portfolio of contracts

Wholesaler sells sunglasses to a large volume of customers under similar contracts. Before accepting a new customer, Wholesaler performs customer acceptance and credit check procedures designed to ensure that it is probable the customer will pay the amounts owed. Wholesaler will not accept a new customer that does not meet its customer acceptance criteria.… Continue reading

Identifying the contract – contract extensions

ServiceProvider has a 12-month agreement to provide Customer with services for which Customer pays $1,000 per month. The agreement does not include any provisions for automatic extensions, and it expires on November 30, 20X6. The two parties sign a new agreement on February 28, 20X7 that requires Customer to pay $1,250 per month in fees, retroactive to December 1, 20X6.

Customer continued to pay $1,000 per month during December, January, and February, and ServiceProvider continued to provide services during that … Continue reading

Product delivered without a written contract

Seller’s practice is to obtain written and customer-signed sales agreements. Seller delivers a product to a customer without a signed agreement based on a request by the customer to fill an urgent need.

Can an enforceable contract exist if Seller has not obtained a signed agreement consistent with its customary business practice?

AnalysisContinue reading