Revenue recognition at a point in time

Revenue recognition at a point in time is included in IFRS 15 Revenue from Contracts with Customers (contents page is here), that 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. Revenue recognition at a point in time

Performance obligations satisfied at a point in time as the default option

We can say that performance obligation satisfied at a point in time is the default option, i.e. if a performance obligation does not meet the criteria of being satisfied over time (discussed above), it is assumed to be satisfied at a point in time. It is then a matter of deciding when exactly a performance obligation is satisfied, which is the date when a customer obtains control of a promised good or service (‘an asset’) (IFRS 15 38). Revenue recognition at a point in time

This section is part of step 5 Recognise revenue as or when each performance obligation is satisfied. If a performance obligation is not satisfied over time, a vendor satisfies the performance obligation at a point in time. A vendor considers indicators of the transfer of control, which include the following: Revenue recognition at a point in time

1. The vendor has a present right to payment for the asset

If the customer is obliged to pay for the asset, this indicates that the customer may have the ability to obtain substantially all of the remaining benefits from the asset. Revenue recognition at a point in time

2. The customer has legal title to the asset

Legal title may indicate that the customer has the ability to direct the use of and obtain substantially all of the remaining benefits from an asset or to restrict the access of other entities to those benefits. If a vendor retains legal title over an asset solely as protection against the customer’s failure to pay, this is a protective right and does not preclude a customer from obtaining control of that asset. Revenue recognition at a point in time

3. The customer has physical possession of an asset

This may indicate that the customer has the ability to direct the use of and obtain substantially all of the remaining benefits from the asset or to restrict the access of other entities to those benefits. However, physical possession may not coincide with control of an asset; for example, consignment stock or bill and hold arrangements may result in physical possession but not control.

4. Significant risks and rewards of ownership

When evaluating whether the customer has the risks and rewards of ownership of an asset, a vendor considers any risks that may give rise to a performance obligation in addition to the performance obligation to transfer the asset. For example, a vendor 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. Acceptance of the asset

The customer’s acceptance of an asset may indicate that it has obtained the ability to direct the use of and obtain substantially all of the remaining benefits from the asset.

Related topics

1. Control of an asset

Control is the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset, or to restrict the access of other entities to those benefits (IFRS 15 31-34). As noted earlier, the definition of control of an asset can be split into three parts:

• ability (a present right),
• direct the use of and
• obtain the benefits from the asset.

These  discussed further by the IASB in paragraph IFRS 15 BC120. The assessment of when control has been transferred to a customer should be made from his perspective (IFRS 15 BC121).

Paragraph IFRS 15 38 provides additional indicators of the transfer of control which are discussed below.

2. Present right to payment for the asset

When a contract execution comes to a point when the entity has the right to a payment, it is an indicator that the control of the asset has been passed to a customer.

3. Transfer of legal title to a customer

When the entity has transferred a legal title to a customer under a contract, it is an indicator that the control of the asset has been passed to a customer. The control may have been passed to a customer even without the transfer of legal title, e.g. when the entity keeps the legal title until all receivables are paid by a customer.

4. Transfer of physical possession

Transfer of physical possession is another indication of transfer of control, but there are notable exceptions:

• repurchase agreements (including call and put options) covered in IFRS 15 B64-B76 and in Example 62 accompanying IFRS 15
• consignment arrangements (e.g. with a dealer or distributor) covered in IFRS 15 B77-B78
• bill-and-hold arrangements covered in IFRS 15 B79-B82 and in Example 63 accompanying IFRS 15

Requirements relating to repurchase agreements can be summarised as follows:

Revenue recognition at a point in time

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