Pre-Contract Establishment Date activities
Partially Satisfied Performance Obligations Before the Identification of a Contract
Entities sometimes begin activities on a specific anticipated contract with their customer before (1) the parties have agreed to all of the contract terms or (2) the contract meets the criteria in step 1 (see Step 1 Identify the contract) of IFRS 15. The IASB staff refer to the date on which the contract meets the step 1 criteria as the “contract establishment date” (CED) and refer to activities performed before the CED as “pre-CED activities.”
TRG Update — Pre-CED Activities
The FASB and IASB staffs noted that stakeholders have identified two issues with respect to pre-CED activities:
- How to recognize revenue from pre-CED activities.
- How to account for certain fulfillment costs incurred before the CED.
The TRG discussed these issues in March 2015.
TRG members generally agreed with the staffs’ conclusion that once the criteria in step 1 have been met, entities should recognize revenue for pre-CED activities on a cumulative catch-up basis (i.e., record revenue as of the CED for all satisfied or partially satisfied performance obligations) rather than prospectively because cumulative catch-up is more consistent with the new revenue standard’s core principle.
The two Q&A below demonstrates the application of the TRG’s general agreement.