Measuring progress toward satisfaction of an obligation or to be more accurate in IFRS: Measuring progress toward complete satisfaction of a performance obligation
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.
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.
This section is part of step 5 Recognise revenue as or when each performance obligation is satisfied. For each performance obligation that is satisfied over time, revenue is recognised by measuring progress towards completion of that performance obligation. This is achieved based on either:
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Method |
Description |
Examples |
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Revenue recognised by directly measuring the value of the goods and services transferred to date to the customer. |
Revenue could be recognised at amount invoiced only if this correspond directly with the value of the goods or services transferred to date, The units produced or units delivered method could provide reasonable proxy for the entity’s performance provided ant work-in-process or finished goods controlled by the customer are appropriately included in the measure of progress. |
Surveys of performance to date, milestones reached or units produced. |
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Revenue recognised based on the extent of efforts or inputs toward satisfying a performance obligation compared to the expected total efforts or inputs needed. Measuring progress toward satisfaction of an obligation
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It may be appropriate to recognise revenue on a straight-line basis if efforts/inputs are expected evenly over the performance period, IFRS 15 requires that if an entity selects an input method such as costs incurred it must adjust the measure of progress for any inputs that do not depict performance, for example costs incurred that:
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Resources consumed, labour hours expended, costs incurred, machine hours used or time lapsed. Measuring progress toward satisfaction of an obligation Measuring progress toward satisfaction of an obligation Measuring progress toward satisfaction of an obligation Measuring progress toward satisfaction of an obligation Measuring progress toward satisfaction of an obligation Measuring progress toward satisfaction of an obligation Measuring progress toward satisfaction of an obligation |
For each separate performance obligation, the same input or output method of assessing progress to date is required to be used. The same method is also required to be applied consistently to similar performance obligations and in similar circumstances.
Reasonable measurement of progress is possible
Revenue recognition is only applied based on performance obligations satisfied over time if an appropriately accurate measurement of progress towards completion of the contractual performance obligations can be made. Measuring progress toward satisfaction of an obligation
An appropriately accurate measurement of progress towards completion would not be made if reliable information to apply an appropriate method of measuring progress is not available. Keeping in mind the sophistication of financial data processing systems available nowadays measuring progress reliably should only in special circumstances not be possible, it should be an exception. Measuring progress toward satisfaction of an obligation
This could be the case in, for example, the early stage of a contract. As an in between solution it is possible to only recognise as revenue over time the costs incurred until a reasonable measure of progress can be made, in case costs are recoverable in the contract with the customer. Measuring progress toward satisfaction of an obligation
Measuring progress toward satisfaction of an obligation
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