Identifying the customer or collaborative arrangement

Identifying the customer or collaborative arrangement – The revenue standard excludes from its scope contracts with a collaborator or a partner that are not customers, but rather share with the entity the risks and rewards of participating in an activity or process. However, a contract with a collaborator or a partner is in the scope of the revenue standard if the counterparty meets the definition of a customer for part or all of the arrangement. Accordingly, a contract with a customer may be part of an overall collaborative arrangement and the revenue standard is applied to that part. Identifying the customer or collaborative arrangement

On the other hand, identifying the customer is straightforward in many instances, but a careful analysis needs to be performed in other situations to confirm whether a customer relationship exists. For example, a contract with a counterparty to participate in an activity where both parties share in the risks and benefits of the activity (such as developing an asset) is unlikely to be in the scope of the revenue guidance because the counterparty is unlikely to meet the definition of a customer. An arrangement where, in substance, the entity is selling a good or service is likely in the scope of the revenue standard, even if it is termed a “collaboration” or something similar. Identifying the customer or collaborative arrangement

The parties to some common types of contracts (for example, contracts with collaborators or partners) can meet the definition of a customer. However, IASB decided that it would not be feasible to develop application guidance that would apply uniformly to various industries because the nature of the relationship (ie supplier-customer versus collaboration or partnership) would depend on specific terms and conditions in those contracts. In many arrangements, an entity would need to consider all relevant facts and circumstances, such as the purpose of the activities undertaken by the counterparty, to determine whether the counterparty is a customer. Examples of arrangements in which an entity would need to make that assessment are as follows:

1. collaborative research and development efforts between biotechnology and pharmaceutical entities or similar arrangements in the aerospace and defense, technology and healthcare industries or in higher education;
2. arrangements in the oil and gas industry in which partners in an offshore oil and gas field may make payments to each other to settle any differences between their proportionate entitlements to production volumes from the field during a reporting period; and
3. arrangements in the not-for-profit industry in which an entity receives grants and sponsorship for research activity and the grantor or sponsor may specify how any output from the research activity will be used.

The revenue standard applies to all contracts, including transactions with collaborators or partners, if they are a transaction with a customer. All of the relationships in a collaboration or partnership agreement must be understood to identify whether all or a portion of the contract is, in substance, a contract with a customer. A portion of the contract might be the sharing of risks and benefits of an activity, which is outside the scope of the revenue standard. Other portions of the contract might be for the sale of goods or services from one entity to the other and therefore in the scope of the revenue standard. Identifying the customer or collaborative arrangement

Example: Development of a new drug

Biotech signs an agreement with Pharma to share equally in the development of a specific drug candidate.

Is there a customer in the scope of IFRS 15? Identifying the customer or collaborative arrangement

Analysis Identifying the customer or collaborative arrangement

It depends……….and this is the reasoning: Identifying the customer or collaborative arrangement

It is unlikely that the arrangement is in the scope of IFRS 15 if the entities will simply work together to develop the drug.

It is likely in the scope of IFRS 15 if the substance of the arrangement is that Biotech is selling its compound to Pharma and/or providing research and development services to Pharma, if those activities are part of Biotech’s ordinary activities. Identifying the customer or collaborative arrangement

Entities should consider whether other applicable guidance (IFRS 11 Joint Arrangements) exists that should be applied when an arrangement is a collaboration rather than a contract with a customer. It could also be necessary to consider whether any elements of the arrangement gave rise to a supplier-customer relationship. The IASB also noted that in some collaborative arrangements, an entity might consider applying the principles of IFRS 15 as an accounting policy developed in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Identifying the customer or collaborative arrangement

Example: Automotive collaborative agreement Identifying the customer or collaborative arrangement

Automotive Supplier S enters into an arrangement with Carmaker D to develop a new technology for D’s cars. Both S and D agree to participate equally in the costs and results of the engineering and development activities. Under the arrangement, S will also produce 100 units of the part developed for payment of 10,000. Identifying the customer or collaborative arrangement

Because the parties are active participants and share in the risks and rewards of the engineering and development activities – i.e. the technology – part of the contract related to the engineering and development could be a collaborative arrangement. However, there is also a revenue contract to produce a series of parts within the overall agreement, which is accounted for under the revenue standard.

Identifying the customer or collaborative arrangement