Implicit promises in a contract

Implicit promises in a contract – IFRS 15 Revenue from Contracts with Customers (contents page is here) introduced a single and comprehensive framework which sets out how much revenue is to be recognised, and when. Implicit promises in a contract

The core principle is that a vendor should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the vendor expects to be entitled in exchange for those goods or services. See a summary of IFRS 15 here. Implicit promises in a contract

This section is part of step 2 identifying performance obligations. Goods or services that are to be transferred to a customer are normally specified in a contract.

However, a contract may also include promises that are implied by a vendor’s customary business practices, published policies, or specific statements if those promises create a valid customer expectation that the vendor will transfer a good or service to it. Implicit promises in a contract

This links to IFRS 15 extending the definition of a contract to include those which are written, oral, or implied by a vendor’s customary business practices (provided in all cases that the arrangements are enforceable).

Consequently, the performance obligations identified in a contract with a customer may not be limited to the goods or services that are explicitly promised in that contract.

Implicit promises in a contract Performance obligations do not include activities that a vendor must perform in order to fulfill a contract, unless the vendor transfers a good or service to the customer as those activities occur. For example, a service provider may need to perform various administrative tasks to set up a contract.

The performance of those tasks does not transfer a service to the customer as the tasks are performed and are therefore not performance obligations.


Implied promises are difficult items in IFRS 15 Revenue accounting. Here is some context from a more legal point of view to help in the assessment of these implicit promises in a contract.

Implied-in-law “good faith” terms

Many contracts include “satisfaction clauses”, in which a promiser (a person/entity/contract party who makes a promise to an other person/entity/contract party (the promisee)) can refuse to pay if he isn’t subjectively satisfied with the promisee’s performance. Strictly speaking, this is an illusory promise, since the promiser has no actual legal burden to pay if he chooses not to.

However, courts will generally imply in law that the promiser must act in good faith and reject the deal only if he is genuinely dissatisfied. As another example, if a contract promises a promisee a certain percentage of the proceeds of a promiser ‘s business activities, this is illusory, since the promiser doesn’t have to do anything: any percentage of zero is zero.

However, courts may find that the promiser made an implied promise to use reasonable efforts to try to make money, and cite him for breach of contract if he does absolutely nothing. The U.C.C. in contracts exclusive to both sides requires “best efforts” in such contracts. This may be read to be the same as a good faith effort, but is seen by some courts as a higher duty.

Implied-in-fact terms

Judges will often infer terms into the contract that the parties did not explicitly cite. For instance, in the “satisfaction clause” case, judges might infer that the parties intended a “reasonableness test” – that the clause could be satisfied if a reasonable person would be satisfied by the promisee’s performance, regardless of whether the promiser himself asserts he is satisfied. (This interpretation is often used in cases in which a performance can be objectively evaluated, such as with the construction of a warehouse; the implied-in-law interpretation above is preferred where satisfaction is more subjective, as with the painting of a portrait.)

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