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.
Under IFRS 15 a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer are accounted for as a single performance obligation. This is known as the ‘series provision’.
A series of distinct goods or services has the same pattern of transfer to the customer if both of the following criteria are met:
Each distinct good or service in the series that the entity promises to transfer to the customer would meet the criteria to be a performance obligation satisfied over time (see STEP 5 Recognise revenue when each performance obligation is satisfied; and
The same method would be used to measure the entity’s progress towards complete satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer.
There are three primary areas in which the accounting treatment may vary for a performance obligation if it is determined that a promise is a single performance obligation comprised of a series of distinct goods rather than a single performance obligation comprised of goods or services that are not distinct from each other:
- Contract modifications because if the remaining undelivered goods or services are distinct (even if part of a single performance obligation under the series provision), the entity will account for the modified contract on a prospective basis, whereas if the remaining goods or services are not distinct from those already provided, there will be a cumulative effect adjustment resulting from the modification;
- Changes in transaction price because IFRS 15’s requirements are applied differently, in some cases, to a single performance obligation comprised of non-distinct goods or services than to a single performance obligation resulting from the series provision; and
- Allocation of variable consideration because the amount of the variable consideration that is recognised at each reporting date could be affected.
The need to consider whether the series provision should apply is relevant to many service contracts and also contracts involving the delivery of a quantity of similar items where those items are not all delivered at the same time, but over the contractual period.