Options to purchase additional goods or services

Contracts frequently include options for customers to purchase additional goods or services in the future. Customer options that provide a material right to the customer (such as a free or discounted good or service) give rise to a separate performance obligation. In this case, the performance obligation is the option itself, rather than the underlying goods or services. Management will allocate a portion of the transaction price to such options, and recognize revenue allocated to the option when the additional … Continue reading

Implicit promises in a contract

Goods or services that are to be transferred to a customer are normally specified in a contract.

However, a contract may also include promises that are implied by a vendor’s customary business practices, published policies, or specific statements if those promises create a valid customer expectation that the vendor will transfer a good or service to it.… Continue reading

Output method – Measuring progress to completion

Output methods result in revenue being recognised based on direct measurement of the value of goods or services transferred to date in comparison with the remaining goods or services to be provided under the contract. When evaluating whether to apply an output method, consideration is given to whether the output selected would reflect the vendor’s performance toward complete satisfaction of its performance obligation(s). An output method would not reflect the vendor’s performance if the output selected fails to measure a … Continue reading

Revenue recognition overtime – Enforceable payment right

The performance obligation may be satisfied over time when the right to payment for performance completed to date is enforceable by the vendor in all circumstances, other than where the contract is terminated due to the vendor’s failure to carry out its obligations. In assessing that enforceability a vendor considers the terms of the contract as well as any laws or regulations that relate to the contract. The enforceable amount must at least compensate the vendor for performance completed to … Continue reading

Revenue recognition overtime – alternative use

The performance obligation may be satisfied over time as a result of the fact that a vendor does not have a practical alternative use for an asset. The vendor would incur significant economic losses to direct the asset for another use (see below). This may occur in some manufacturing contracts where the basic design of the asset is the same across all contracts, yet the customisation is substantial and therefore to redirect a nearly completed asset to another customer would … Continue reading

STEP 5 Recognise revenue when each performance obligation is satisfied

Revenue is recognised when (or as) goods or services are transferred to a customer. A vendor satisfies each of its performance obligations (that is, it fulfils its promises to the customer) by transferring control of the promised good or service underlying that performance obligation to the customer.

In the past requirements for revenue recognition (IAS 18 Revenue) were based around an assessment of whether the risks and rewards of ownership of a good or service had been transferred to a … Continue reading

STEP 4 Allocating the Transaction Price to Performance Obligations

The amount allocated to each separate performance obligation reflects the consideration to which a vendor expects to be entitled in exchange for transferring the related goods or services to the customer. The starting point for the allocation is to base it on the stand-alone selling prices of each performance obligation.

Allocating the transaction price based on the stand-alone selling priceContinue reading

Performance obligations satisfied over time

A vendor satisfies a performance obligation and recognises revenue over time when one of the following three criteria is met:

  1. The customer simultaneously receives and consumes the economic benefits provided by the vendor’s performance

  2. The vendor creates or enhances an asset controlled by the customer

  3. The vendor’s performance does not create an asset for which the vendor has an alternative use, the vendor has an enforceable right to payment for performance completed to date.

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Revenue recognition overtime – alternative use

The performance obligation may be satisfied over time as a result of the fact that a vendor does not have a practical alternative use for an asset. The vendor would incur significant economic losses to direct the asset for another use (see below). This may occur in some manufacturing contracts where the basic design of the asset is the same across all contracts, yet the customisation is substantial and therefore to redirect a nearly completed asset to another customer would … Continue reading

Revenue recognition overtime – enforceable payment right

The performance obligation may be satisfied over time when the right to payment for performance completed to date is enforceable by the vendor in all circumstances, other than where the contract is terminated due to the vendor’s failure to carry out its obligations. In assessing that enforceability a vendor considers the terms of the contract as well as any laws or regulations that relate to the contract. The enforceable amount must at least compensate the vendor for performance completed to … Continue reading