IFRS 15 – Performance obligations satisfied over time

Revenue can be recognized either over a period of time or at a point in time, depending on when a performance obligation is fulfilled.

An entity must consider 3 criteria to determine whether control over an asset is transferred over time. If any of these criteria is met, then the entity should recognize revenue over time:

  1. The customer simultaneously receives and consumes the economic benefits provided by the vendor’s performance; or
  2. The vendor creates or enhances an asset controlled by the customer; or
  3. The vendor’s performance does not create an asset for which the vendor has an alternative use, and the vendor has an enforceable right to payment for performance completed to date.

Criterion 1: Customer simultaneously receives and consumes the benefits

In a typical service contract, the entity does not create a tangible asset for which it can transfer control to the customer. Instead, the customer automatically consumes the benefits of the service as the entity provides that service.

On some occasions, it may be less straightforward to identify whether there is a simultaneous receipt and consumption of the benefits from the vendor’s performance.

In these cases, a key test is whether, in order to complete the remaining performance obligations, another vendor would need substantially to re-perform the work the vendor has completed to date. If another vendor would not need to re-perform the work, then the customer is simultaneously receiving and consuming the economic benefits arising from the vendor’s performance.


Example 1

ABC Ltd enters into a contract to provide monthly payroll processing services to a customer for 2 years.

If the entity ceased providing services to the customer at the end of the first year, another entity would not need to re-perform the payroll processing services performed prior to that date. In this case, it is clear that the customer simultaneously receives and consumes the benefits of ABC’s performance.

ABC Ltd, therefore, concludes that revenue from providing the payroll services meet the criteria for recognizing revenue over time.


Criterion 2: Vendor creates or enhances an asset controlled by the customer

This is another criterion that, if met, makes a performance obligation satisfied over time. The most typical application of this criterion is in the construction industry when an asset is created or enhanced on the customer’s land

Criterion 3: The asset has no alternative use and the vendor has an enforceable right to payment 

This 2-step criterion may be relevant to entities in the construction and real estate sector, and also applies when a specialized asset is to be constructed that can only be used by the customer. It may also apply when an asset is to be constructed to a customer’s specification.

No alternative use

A vendor does not have an alternative use for an asset if it is unable, either contractually or practically, to readily direct the asset (which may be a partially completed asset) to be used for something else while it is being created or enhanced, such as selling it a different customer. 

Enforceable right to payment

This criterion is met if an entity is entitled to payment for performance completed to
date,
at all times during the contract term, if the customer terminates the contract for
reasons other than the entity’s non-performance.


Example 2

Entity A enters into a contract with Government Z to construct a military tank. The military tank is designed to Government Z’s specifications and cannot be sold to any other government or third party without incurring significant costs to reconfigure it.

Government Z makes non-refundable progress payments as the tank is being constructed. If Government Z terminates the contract, it must pay for work performed to date (cost plus reasonable margin).

Physical possession of the tank passes to Government Z once construction is completed.

Solution 2

Revenue should be recognized over time because:

  • The military tank is designed to Government Z’s specifications. Entity A cannot sell the tank to another customer without significant cost and therefore, the tank does not have an alternative use, and
  • Entity A has an enforceable right to payment for performance to date. If Government Z terminates the contract, it must pay for work performed to date.