No alternative use enforceable payment right

No alternative use enforceable payment right for work to date is the last phase in the satisfaction of performance obligations in IFRS 15 Revenue recognition. This is part of a primary and fundamental subject in the recognition of revenue. There are two ways of recognising revenue, revenue recognition over time and revenue recognition at a point in time. Revenue recognition over time is often referred to as the ‘Percentage of completion‘ method under the (superseded) IAS 11 Construction contracts.

Revenue recognition at a point in time

The general principle is the revenue is recognised at a point in time (and as such it is the most common type of sales transaction at least in volume, just think of: a retailer sells a candy bar for cash in the shopping mall). As a result there are three criterion (see below ability, direct the use and obtain benefits from) that have to be met to qualify as revenue recognised over time.

Revenue recognition No alternative use enforceable payment right

Under IFRS 15, an entity only recognises revenue when it satisfies an identified performance obligation by transferring a promised good or service to a customer. A good or service is considered to be transferred when the customer obtains control.

Obtain control

IFRS 15 states that “control of an asset refers to the ability to direct the use and obtain substantially all of the remaining benefits from the asset”. [IFRS 15 33] No alternative use enforceable payment right

The IASB explained the key terms in the definition of control in the Basis for Conclusions, as follows: [IFRS 15 BC 118]

Ability –

a customer must have the present right to direct the use of, and obtain substantially all of the remaining benefits from, an asset for an entity to recognise revenue. For example, in a contract that requires a manufacturer to produce an asset for a customer, it might be clear that the customer will ultimately have the right to direct the use of, and obtain substantially all of the remaining benefits from, the asset. However, the entity should not recognise revenue until the customer has actually obtained that right (which, depending on the contract, may occur during production or afterwards). No alternative use enforceable payment right

Direct the use of –

a customer’s ability to direct the use of an asset refers to the customer’s right to deploy or to allow another entity to deploy that asset in its activities or to restrict another entity from deploying that asset. No alternative use enforceable payment right

Obtain the benefits from –

the customer must have the ability to obtain substantially all of the remaining benefits from an asset for the customer to obtain control of it. No alternative use enforceable payment right  Conceptually, the benefits from a good or service are potential cash flows (either an increase in cash inflows or a decrease in cash outflows).

IFRS 15 33 indicates that a customer can obtain the benefits directly or indirectly in many ways, such as: using the asset to produce goods or services (including public services); using the asset to enhance the value of other assets; using the asset to settle a liability or reduce an expense; selling or exchanging the asset; pledging the asset to secure a loan; or holding the asset. No alternative use enforceable payment right

Transfer of control –

Under IFRS 15, the transfer of control to the customer represents the transfer of the rights with regard to the good or service. The customer’s ability to receive the benefit from the good or service is represented by its right to substantially all of the cash inflows, or the reduction of the cash outflows, generated by the goods or services. Upon transfer of control, the customer has sole possession of the right to use the good or service for the remainder of its economic life or to consume the good or service in its own operations. No alternative use AND enforceable right to payment work to 

Performance obligation satisfied over time/ Performance obligation satisfied at a point in time

Frequently, entities transfer the promised goods or services to the customer over time. While the determination of whether goods or services are transferred over time is straightforward in some contracts (e.g., many service contracts), it is more difficult in other contracts. No alternative use enforceable payment right

IFRS 15 35 states that an entity transfers control of a good or service over time if one of the following criteria is met:

  • As the entity performs, the customer simultaneously receives and consumes the benefits provided by the entity’s performance.
  • The entity’s performance creates or enhances an asset (e.g., work in progress) that the customer controls as the asset is created or enhanced. No alternative use enforceable payment right
  • The entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.  No alternative use enforceable payment right

The question

The following decision tree illustrates how to evaluate whether control transfers over time/at a point in time:


The third question (see below explanation) is: Does the entity’s performance create an asset with no alternative use to the entity AND the entity has enforceable right to payment for performance completed to date?

Yes  |  No

Reference – IFRS 15 36IFRS 15 B6 – B8IFRS 15 37IFRS 15 B9 – B12


Document your decisions in your financial close file to facilitate internal review and approval and external audits.

Asset with no alternative use and right to payment 

In some cases, it may be unclear whether the asset that an entity creates or enhances is controlled by the customer when considering the first two criteria for evaluating whether control transfers over time. Therefore, the Board added a third criterion, which requires revenue to be recognised over time if both of the following two requirements are met: No alternative use enforceable payment right

1. Asset with alternative use

The entity’s performance does not create an asset with alternative use to the entity. When the entity’s performance creates an asset with an alternative use to the entity (e.g., standard inventory items), the entity can readily direct the asset to another customer. No alternative use enforceable payment right

In those cases, the entity (not the customer) controls the asset as it is created because the customer does not have the ability to direct the use of the asset or restrict the entity from directing that asset to another customer. The standard includes the requirements for ’alternative use’ in IFRS 15 36IFRS 15 B6 – B8. No alternative use is illustrated in Example 15 in IFRS 15 IE73 – IE76.

The assessment of whether an asset has an alternative use to the entity is made at contract inception. After contract inception, an entity is not permitted to update the assessment of the alternative use of an asset unless the parties to the contract approve a contract modification that substantively changes the performance obligation. [IFRS 15 36].

The Boards concluded that, when an entity is creating something that is highly customised for a particular customer, it is less likely that the entity could use that asset for any other purpose. [IFRS 15.BC135-BC137]. That is, the entity would likely need to incur significant rework costs or sell the asset at a significantly reduced price.

As a result, the customer could be viewed as having control of the asset. However, in this situation, the Boards concluded it was not enough to determine that the customer controls the asset. The entity would also need to determine it has an enforceable right to payment for performance to date, as is discussed in 2. below. No alternative use enforceable payment right

In assessing whether an asset has an alternative use, an entity is required to consider the effects of contractual restrictions and practical limitations on it’s ability to readily direct that asset for another use (e.g. selling it to a different customer). The standard clarifies that the possibility of the contract with the customer being terminated is not a relevant consideration in this assessment. [IFRS 15 B6]. No alternative use enforceable payment right

In making the assessment of whether a good or service has alternative use, an entity must consider any substantive contractual restrictions. A contractual restriction is substantive if an entity expects the customer to enforce its rights to the promised asset if the entity sought to direct the asset for another use. No alternative use enforceable payment right

Contractual restrictions that are not substantive are not considered. As an example, the standard notes that contractual restrictions are not substantive if an asset is largely interchangeable with other assets that the entity could transfer to another customer without breaching the contract and without incurring significant costs that otherwise would not have been incurred in relation to that contract. [IFRS 15 B7]. No alternative use enforceable payment right

It is important to note that the standard also includes a practical limitation. Therefore, an asset would not have an alternative use if the entity would incur significant economic losses to direct the asset for another use.

A significant economic loss could arise because the entity either would incur significant costs to rework the asset or would only be able to sell the asset at a significant loss. For example, an entity may be practically limited from redirecting assets that either have design specifications that are unique to a customer or are located in remote areas. [IFRS 15 B8].

The assessment at contract inception of whether a good or service has an alternative use will require significant judgement, taking into consideration all the facts and circumstances of the contract. An important factor to be considered is the effect of any substantive contractual restrictions and/or practical limitations on an entity’s ability to readily direct that asset for another use, such as selling it to a different customer. No alternative use enforceable payment right

2. Enforceable right to payment for performance completed to date

The entity has an enforceable right to payment for performance completed to date (see example 16 IFRS 15 IE77 – IE80). To evaluate this criterion, the entity is required to consider the terms of the contract and any laws or regulations that relate to it. IFRS 15 states that the right to payment for performance completed to date need not be for a fixed amount.

However, at any time during the contract term, an entity must be entitled to an amount that at least compensates the entity for performance completed to date (IFRS 15 B9 – B12), even if the contract is terminated by the customer (or another party) for reasons other than the entity’s failure to perform as promised [IFRS 15 37]

The IASB concluded that a customer’s obligation to pay for the entity’s performance is an indicator that the customer has obtained benefit from the entity’s performance. [IFRS 15 BC142] No alternative use enforceable payment right

When evaluating whether an entity has an enforceable right to payment for performance completed to date, the standard requires the entity to consider the terms of the contract and any laws or regulations that relate to it. [IFRS 15 37, IFRS 15 B12]. No alternative use enforceable payment right

The standard states that the right to payment for performance completed to date need not be for a fixed amount. However, at any time during the contract term, an entity must be entitled to an amount that at least compensates the entity for performance completed to date, even if the customer can terminate the contract for reasons other than the entity’s failure to perform as promised. [IFRS 15 37, IFRS 15 B9]. No alternative use enforceable payment right

The Boards concluded that a customer’s obligation to pay for the entity’s performance is an indicator that the customer has obtained benefit from the entity’s performance. [IFRS 15 BC142].

The standard clarifies that an amount that would compensate an entity for performance completed to date would be an amount that approximates the selling price of the goods or services transferred to date (e.g. recovery of the costs incurred by an entity in satisfying the performance obligation plus a reasonable profit margin), rather than compensation for only the entity’s potential loss of profit if the contract were to be terminated. [IFRS 15 B9]. No alternative use enforceable payment right

Compensation for a reasonable profit margin need not equal the profit margin expected if the contract was fulfilled as promised, but the standard states that an entity should be entitled to compensation for either of the following amounts: [IFRS 15 B9] No alternative use enforceable payment right

  • a proportion of the expected profit margin in the contract that reasonably reflects the extent of the entity’s performance under the contract before termination by the customer (or another party); or No alternative use enforceable payment right
  • a reasonable return on the entity’s cost of capital for similar contracts (or the entity’s typical operating margin for similar contracts) if the contract specific margin is higher than the return the entity usually generates from similar contracts. No alternative use enforceable payment right

The standard is clear that an entity’s right to payment for performance completed to date need not be a present unconditional right to payment. In many cases, an entity will have an unconditional right to payment only at an agreed-upon milestone or upon complete satisfaction of the performance obligation.

Therefore, when assessing whether it has a right to payment for performance completed to date, an entity is required to consider whether it would have an enforceable right to demand or retain payment for performance completed to date if the contract were to be terminated before completion (for reasons other than the entity’s failure to perform as promised). [IFRS 15 B10]. No alternative use enforceable payment right

In some contracts, a customer may have a right to terminate the contract only at specified times during the life of the contract or the customer might not have any right to terminate the contract.

The standard states that, if a customer acts to terminate a contract without having the right to terminate the contract at that time (including when a customer fails to perform its obligations as promised), the contract (or other laws) might entitle the entity to continue to transfer the promised goods or services to the customer promised in the contract and require the customer to pay the promised consideration.

In those circumstances, an entity has a right to payment for performance completed to date because the entity has a right to continue to perform its obligations in accordance with the contract and to require the customer to perform its obligations (which include paying the promised consideration). [IFRS 15 B11].

 Entities are required to consider any laws, legislation or legal precedent that could supplement or override the contractual terms. [IFRS 15 B12]. In addition, the standard clarifies that including a payment schedule in a contract does not, in and of itself, indicate that the entity has the right to payment for performance completed to date. No alternative use enforceable payment right

The entity must examine information that may contradict the payment schedule and may represent the entity’s actual right to payment for performance completed to date. As highlighted in the following example, payments from a customer must approximate the selling price of the goods or services transferred to date to be considered a right to payment for performance to date. A fixed payment schedule may not meet this requirement. [IFRS 15 B13]. No alternative use enforceable payment right

No alternative use enforceable payment right

No alternative use enforceable payment right

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