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IFRS 15 Measuring progress to completion – Best complete explanation

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IFRS 15 Measuring progress to completion

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Introduction

For each performance obligation satisfied over time, revenue must be recognised over time (IFRS 15.39-45 & IFRS 15.B14-B19). To do so, an entity shall measure the progress towards complete satisfaction of the performance obligation.

The measurement of progress has the objective of faithfully depicting an entity’s performance in transferring control of the goods or services promised to the customer (that is, the extent to which the performance obligation is satisfied).

An entity shall apply a single method of measuring progress for each performance obligation satisfied over time, and shall apply that method consistently to similar performance obligations and in similar circumstances.

At the end of each reporting period, an entity shall remeasure its progress towards complete satisfaction of each performance obligation satisfied over time.

In July 2015 the Joint Transition Resource Group (TRG a combined effort by IASB and FASB to detect problems raised by the implementation of the revenue recognition standards) clarified that the principle of applying a single method of measuring progress for a given performance obligation is also applicable to a combined performance obligation, i.e. one that contains multiple non-distinct goods or services.

Hence, it is not appropriate to apply several methods depending on the stage of performance, even if these methods all belong to one of the two major categories of methods presented below (output methods vs input methods), for example a method measuring progress on the basis of hours expended, and a method measuring progress on the basis of labour costs incurred.

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Transfer of control for distinct licences

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Transfer of control for distinct licences – IFRS 15 indicates that an entity must determine, at contract inception, whether it will transfer control of a promised good or service over time. If an entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time. A performance obligation is satisfied over time if it meets one of the following criteria: Transfer of control for distinct licences The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs – by providing hosting services, for example. Transfer of control for distinct licences The entity’s performance creates or enhances an asset that the customer controls as the asset is created … Read more

Satisfaction of performance obligations

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Satisfaction of performance obligations – An entity recognises revenue only when it satisfies a performance obligation by transferring control of a promised good or service to the customer. Control of an asset refers to the ability of the customer to direct the use of and obtain substantially all of the cash inflows, or the reduction of cash outflows, generated by the goods or services. Control also means the ability to prevent other entities from directing the use of, and receiving the benefit from, a good or service. Satisfaction of performance obligations The standard indicates that an entity must determine at contract inception whether it will transfer control of a promised good or service over time. If an entity does not … Read more