Measuring progress toward satisfaction of an obligation

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:

Method

Description

Examples

Output methods

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.

Input methods

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

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:

  • do not contribute to progress (eg excess or unexpected wasted material compared to sales contract calculations or significant inefficiencies in the performance not reflected in the contracted price ),
  • are not proportionate to progress of completion (eg some non-distinct good produced from another supplier with limited involvement by the entity).Therefore, costs of goods used to satisfy the performance obligations in the contract may only be used if at inception of the contract it was expected that all of the following terms of condition would be met upon completion:
    • the good is not distinct,
    • the client (IFRS: customer) is expected to obtain control of the good significantly before receiving services related to this good,
    • the costs of the transferred good is significant relative to the total expected costs to complete the performance obligation/contract promise,
    • the goods is procured from a third party without being significantly involved in designing and manufacturing the good.

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

Measuring progress toward satisfaction of an obligation Only those goods or services for which the vendor has transferred control of are included in the assessment of progress to date.

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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