Distinct goods or services

Distinct goods or services

Why do we need to know?

Distinct goods or services is a cornerstone of IFRS 15 Revenue from contracts with customers. Distinct goods

Determining a distinct good or service is part of identifying separate performance obligations. An important item to look at is whether a ‘promise to’ in a contract (established to be a contract for accounting purposes in Step 1) is a distinct good or service, and as a result thereof is a performance obligation. Here is the context: Distinct goods

A good or service (or bundle of goods and services) is distinct if the customer can benefit from the good or service on its own or together with other readily available resources (i.e., the good or service is capable of being distinct) and the good or service is separately identifiable from other promises in the contract (i.e., the good or service is distinct within the context of the contract). A promised good or service that an entity determines is not distinct is combined with other goods or services until a distinct performance obligation is formed.

Use the following decision tree to identify distinct goods/services or to combine them to come to a distinct bundle of goods/services:

Contract modifications

It is common in the software industry to change the scope or price of the contract. For example, a vendor may license software and provide PCS to a customer in an initial transaction and then license additional software to the same customer at a later time. In general, any change to an existing contract is a modification per the guidance when the parties to the contract approve the modification either in writing, orally, or based on the parties’ customary business practices. A new contract entered into with an existing customer could also be viewed as the modification of an existing contract, depending on the circumstances.

In determining whether a contract has been modified, among other factors, company might consider whether:

• the terms and conditions of the new contract were negotiated separately from the original contract, and
• the additional goods or services were subject to a competitive bid process, and
• any discount to the standalone selling price of the additional goods or services is attributable to the original contract.

Modifications are accounted for as either a separate contract or as part of the existing contract (either prospectively or through a cumulative catch-up adjustment). This assessment is driven by whether

1. the modification adds distinct goods and services and
2. the distinct goods and services are priced at their standalone selling prices.

Modification accounted for as a separate contract

A modification is accounted for as a separate contract if the additional goods or services are distinct and the contract price increases by an amount that reflects the standalone selling price of the additional goods or services. The guidance provides some flexibility to adjust the standalone selling price to reflect contract-specific circumstances. For example, a company might provide a discount to a recurring customer that it would not provide to a new customer because it does not incur the same selling-related costs.

Modification accounted for prospectively

The modification is accounted for as if it were a termination of the original contract and the creation of a new contract if the additional goods or services are distinct, but the price of the added goods or services does not reflect standalone selling price. Any unrecognized revenue from the original contract and the additional consideration from the modification is combined and allocated to all of the remaining performance obligations under the original contract and modification.

Modification accounted for through a cumulative catch-up adjustment

If the added goods or services are not distinct and are part of a single performance obligation that is only partially satisfied when the contract is modified, the modification is accounted for through a cumulative catch-up adjustment.

Example Licensing

A license establishes a customer’s rights to the intellectual property of an entity. Licenses of intellectual property may include, but are not limited to, licenses of any of the following:

• Software (other than specific software subject to a hosting arrangement) and technology Distinct goods
• Motion pictures, music, and other forms of media and entertainment Distinct goods
• Franchises Distinct goods
• Patents, trademarks, and copyrights. Distinct goods

In addition to a promise to grant a license (or licenses) to a customer. Those promises may be explicitly stated in the contract or implied by an entity’s customary business practices, published policies, or specific statements. As with other types of contracts, when a contract with a customer includes a promise to grant a license (or licenses) in addition to other promised goods or services, an entity identifies each of the performance obligations in the contract (as per above diagram). 

If the promise to grant a license is not distinct from other promised goods or services in the contract in accordance with the identification criteria, an entity should account for the promise to grant a license and those other promised goods or services together as a single performance obligation (‘bundling’). Distinct goods or services

Examples of licenses that are not distinct from other goods or services promised in the contract include the following: 

• A license that forms a component of a tangible good and that is integral to the functionality of the good
• A license that the customer can benefit from only in conjunction with a related service (such as an online service provided by the entity that enables, by granting a license, the customer to access content). 

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