The Best 1 Perfect Read – Performance obligations at a point in time

Performance obligations at a point in time

or in full ‘Performance obligations satisfied at a point in time’) and Performance obligations satisfied over time are the two choices in IFRS 15. Performance obligations at a point in time

Determine over time

To determine whether revenue allocated to a performance obligation should be recognised over time, IFRS 15 requires an entity to consider three criteria. If any one of them is met, this means that control is transferred to the customer over time, and thus revenue shall likewise be recognised over time. The entity shall assess this at contract inception. Performance obligations at a point in time

In summary: Performance obligations at a point in time

Performance obligations at a point in time

These criteria shall be applied to all goods and services sold by the entity, irrespective of sector. Performance obligations at a point in time

However, the Basis for Conclusions suggests that these criteria are likely to be more relevant in certain situations (cf. IFRS 15.BC125, IFRS 15.BC129 and IFRS 15.BC132): Performance obligations at a point in time

  • “typical” (i.e. relatively simple) service provisions should generally be accounted for over time under criterion IFRS 15.35(a);
  • the second criterion (IFRS 15.35(b)) applies when the customer clearly controls work in progress;
  • the last criterion (IFRS 15.35(c)) should be considered, by default, when the two previous criteria are not met (for example, services tailored to a customer that ultimately result in the delivery of a report, or the construction of a complex industrial asset on the entity’s premises).

If a performance obligation is not satisfied over time, then an entity recognises revenue at the point in time at which it transfers control of the good or service to the customer. Performance obligations at a point in time

Performance obligations satisfied at a point in time

An entity has ‘control’ of a good or service when it has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the good or service (IFRS 15.32–33). Performance obligations at a point in time

The standard includes indicators of when the transfer of control occurs in case of performance obligations satisfied at a point in time (IFRS 15.38).

Performance obligations at a point in time

IFRS 15 defines control of an asset (whether a good or a service) as the ability to direct the use of the asset (i.e. it has a present right) and to obtain substantially all of the remaining benefits of it (i.e. potential cash flows, whether inflows or savings in outflows, that can be obtained directly or indirectly by using, reselling, exchanging or holding the asset, or pledging it to secure a loan). Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset. Performance obligations at a point in time

The IFRS 15 Basis for Conclusions states that control should be assessed from the perspective of the customer (even though assessing control from the perspective of the entity would lead to the same conclusion in many situations – cf. IFRS 15.BC121). This perspective minimises the risk of an entity recognising revenue that does not coincide with the transfer of goods or services to the customer. Performance obligations at a point in time

In addition to the definition of control, the Standard also includes a list of indicators to help an entity to determine the point in time at which control is transferred to the customer (when it is not transferred over time). These indicators represent attributes of control that may be more or less relevant in different situations. Performance obligations at a point in time

As a result an entity should indicators of the transfer of control which include, but are not limited to, the following ([IFRS 15.38, IFRS 15.B83-B86) (see above table): Performance obligations at a point in time

  1. the entity has a present right to payment for the asset; Performance obligations at a point in time
  2. the customer has obtained legal title to the asset. If an entity retains legal title solely as protection against the customer’s failure to pay, those rights of the entity would not preclude the customer from obtaining control of an asset; Performance obligations at a point in time
  3. the entity has transferred physical possession of the asset. However, physical possession does not necessarily coincide with control of an asset. For example, in some repurchase agreements and in some consignment arrangements, a customer or consignee may have physical possession of an asset that the entity controls (see ‘Consignment arrangements‘). Conversely, in some bill-and- hold arrangements (see ‘Bill-and-hold arrangements’), the entity may have physical possession of an asset that the customer controls;
  4. the customer has the significant risks and rewards of ownership of the asset. An entity shall exclude any risks that give rise to a distinct performance obligation in addition to the performance obligation to transfer the asset (for example, an entity may have transferred control of an asset to a customer but not yet satisfied an additional performance obligation to provide maintenance services related to the transferred asset);
  5. the customer has accepted the asset (see contractual customer acceptance clauses allowing a customer to cancel a contract or require an entity to take remedial action if a good or service does not meet agreed-upon specifications.). If customer acceptance is not purely formal, the entity cannot conclude that the customer has obtained control until the entity receives the customer’s acceptance.
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In practice, it can be difficult to assess control where the asset transferred is a service. IFRS 15 includes a number of criteria that can be used to determine whether control is transferred to the customer over time (see ‘Determine over time‘ above). The Standard notes that one of these criteria is typical of many service contracts: the asset created by the entity’s performance is immediately consumed by the customer.

Finally, when evaluating whether a customer obtains control of an asset, an entity shall consider any agreement to repurchase the asset (see ‘Repurchase agreement‘). Performance obligations at a point in time

The ‘benefits’ of an asset are the potential cash flows – inflows or savings in outflows – that can be obtained directly or indirectly, including by using the asset to: Performance obligations at a point in time 

  • produce goods or provide services (including public services); Performance obligations at a point in time 
  • enhance the value of other assets; and Performance obligations at a point in time 
  • settle liabilities or reduce expenses; Performance obligations at a point in time 
  • selling or exchanging the asset; Performance obligations at a point in time 
  • pledging the asset to secure a loan; and Performance obligations at a point in time 
  • holding the asset. Performance obligations at a point in time 

Relevant considerations in case of performance obligations satisfied at a point in time include the following.

  • In some cases, possession of legal title is a protective right and may not coincide with the transfer of control of the goods or services to a customer – e.g. when a seller retains title solely as protection against the customer’s failure to pay.
  • In consignment arrangements (see Consignment arrangements‘) and some repurchase arrangements (see ‘Repurchase agreements‘), an entity may have transferred physical possession but still retain control. Conversely, in bill-and-hold arrangements
  • (see Bill-and-hold arrangements‘) an entity may have physical possession of an asset that the customer controls.
  • In some arrangements, a customer may obtain control of an asset before it has physical possession – e.g. a bank purchasing a fixed amount of gold from a mine may be able to sell the gold for immediate physical settlement before the refinement process is completed.
  • When evaluating the risks and rewards of ownership, an entity excludes any risks that give rise to a separate performance obligation in addition to the performance obligation to transfer the asset. In some cases, the customer may have the rewards of ownership, but not the risks. This does not necessarily preclude the customer from having control. An entity considers whether the other indicators are more relevant and the customer’s ability to direct the use of and obtain substantially all of the benefits from the asset.
  • An entity needs to assess whether it can objectively determine that a good or service provided to a customer conforms to the specifications agreed in a contract (see Customer acceptance (Step 1 IFRS 15 Contracts with customers)‘).
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Food for thought – Judgement may be required to determine the point in time at which control transfers

The indicators of transfer of control are factors that are often present if a customer has control of an asset; however, they are not individually determinative, nor are they a list of conditions that have to be met. The standard does not suggest that certain indicators should be weighted more heavily than others, nor does it establish a hierarchy that applies if only some of the indicators are present. However, it remains possible that in some facts and circumstances certain indicators will be more relevant than others and so carry greater weight in the analysis.

Judgement may be required to determine the point in time at which control transfers. This determination may be particularly challenging when there are indicators that control has transferred alongside ‘negative’ indicators suggesting that the entity has not satisfied its performance obligation.

IFRS 15.BC155

Food for thought – Potential challenges may exist in determining the accounting for some delivery arrangements

When evaluating at which point in time control transfers to the customer, the shipping terms of the arrangement are a relevant consideration. Shipping terms alone do not determine when control transfers – i.e. an entity considers them along with other indicators of control to assess when the customer has the ability to direct the use of, and obtain substantially all of the benefits from, the asset.

However, shipping terms often indicate the point in time when the customer has legal title, the risks and rewards of ownership aPerformance obligation Delivery of goodsnd a present obligation to pay – all of which are indicators that control has transferred.

The Incoterms of the International Chamber of Commerce are used frequently in international purchase-and-sales contracts. They include standard trade terms such as ‘free on board’ (FOB), ‘cost, insurance and freight’ (CIF) and ‘ex works’ (EXW).

In the case of FOB, when the goods are loaded onto the ship the customer usually receives the bill of lading and takes over the risk of loss or damage to the goods. This may indicate that the customer obtains control when the goods are loaded onto the ship and the bill of lading has been transferred to the customer.

If control of the goods transfers to the customer before delivery to the final destination, then an entity considers whether the transportation service is a distinct performance obligation and, if so, whether it acts as a principal or an agent for the shipping service (see ‘Principal vs agent principals‘).

When goods are shipped, the risk of loss may often be transferred to a third party while the goods are in transit. The fact that the seller transfers its risk of loss to another party (i.e. the third party shipping company or insurance company) does not mean that the customer has the ability to direct the use or obtain substantially all of the benefits from the goods or services. An entity needs to consider this when assessing at which point in time control transfers to the customer.

If the entity concludes that transfer of control has occurred when the product is shipped, then it also considers whether its business practices give rise to a separate performance obligation in addition to the performance obligation to transfer the product itself – i.e. a stand-ready obligation to cover the risk of loss if goods are damaged in transit. If a separate performance obligation is identified, then only the revenue allocated to the sale of the goods is recognised at the shipping date.

Food for thought – Indirect channels and sell-in vs sell-throughDetermine over time

Many entities sell through distributors and resellers. These transactions will require judgement to determine if the transfer of control occurs on delivery to the intermediary (sell-in model) or when the good is resold to the end customer (sell-through model). Entities need to consider the guidance on consignment sales (see Consignment arrangements‘) and variable consideration (see ‘Variable consideration (and the constraint)) to determine which model is appropriate.

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Also read: Performance obligations at a point in time

Performance obligations at a point in time

Performance obligations at a point in time Determine over time point in time at which control transfers transfer of control of the goods or services

Performance obligations at a point in time Determine over time point in time at which control transfers transfer of control of the goods or services

Performance obligations at a point in time Determine over time point in time at which control transfers transfer of control of the goods or services

Performance obligations at a point in time Determine over time point in time at which control transfers transfer of control of the goods or services

Performance obligations at a point in time Determine over time point in time at which control transfers transfer of control of the goods or services

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Performance obligations at a point in time Determine over time point in time at which control transfers transfer of control of the goods or services

Performance obligations at a point in time Determine over time point in time at which control transfers transfer of control of the goods or services

Performance obligations at a point in time Determine over time point in time at which control transfers transfer of control of the goods or services

Performance obligations at a point in time Determine over time point in time at which control transfers transfer of control of the goods or services

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