Identifying the contract

Learning objectives

• Identify the criteria for the existence of a contract (approval and commitment of the parties, identifiable rights, payment terms, commercial substance, probable collection of the consideration).L1, L2
• Assess the probability of collection, taking into account the customer's ability and intention to pay and, where applicable, an expected price concession.L2, L3, L4
• Determine the contract term and the treatment of consideration received when the criteria are not met (a liability until the criteria are met or an event specified by the standard occurs).L2, L3

Normative references

• IFRS 15 §9A contract with a customer is accounted for under the standard only if five cumulative criteria are met: approval by the parties (in writing, orally or in line with customary business practices) and commitment to perform; identification of each party's rights; identification of the payment terms; commercial substance, meaning that the risk, timing or amount of the entity's future cash flows is expected to change as a result of the contract; and probability of collecting the consideration to which the entity will be entitled, assessed solely on the customer's ability and intention to pay when due (that consideration may be lower than the contract price if a price concession is given).
• IFRS 15 §10A contract is an agreement between two or more parties that creates enforceable rights and obligations; enforceability is a matter of law. A contract can be written, oral or implied by customary business practices; the entity considers those practices, which may vary across jurisdictions, industries, classes of customers or of goods and services, in determining when an agreement creates enforceable rights and obligations.
• IFRS 15 §11Some contracts have no fixed duration or renew automatically; the entity applies the standard to the duration of the contract in which the parties have present enforceable rights and obligations.
• IFRS 15 §12A contract does not exist for the purposes of the standard if each party has the unilateral enforceable right to terminate a wholly unperformed contract without compensating the other party. A contract is wholly unperformed if the entity has not yet transferred any promised goods or services and has not yet received, and is not yet entitled to receive, any consideration.
• IFRS 15 §13If the criteria in paragraph 9 are met at contract inception, the entity does not reassess them unless there is an indication of a significant change in facts and circumstances, for example a significant deterioration in the customer's ability to pay, which leads to a reassessment of the probability of collection for the remaining goods or services to be transferred.
• IFRS 15 §14If a contract does not meet the criteria in paragraph 9, the entity continues to assess it to determine whether the criteria are subsequently met.
• IFRS 15 §15If the contract does not meet the criteria in paragraph 9 and the entity receives consideration, it recognises that consideration as revenue only when either (a) it has no remaining obligations to transfer goods or services and all, or substantially all, of the promised consideration has been received and is non-refundable, or (b) the contract has been terminated and the consideration received is non-refundable.
• IFRS 15 §16The consideration received is recognised as a liability until one of the events in paragraph 15 occurs or the criteria in paragraph 9 are met; depending on the facts, that liability represents the obligation to transfer goods or services or to refund the consideration, and it is measured at the amount received.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

18 questions

• In what order does the five-step teaching approach apply the core principle of IFRS 15?L1
• For a contract with a customer to exist under IFRS 15, it must necessarily be in writing.L1
• A contract with a customer is accounted for under IFRS 15 only if all the criteria set by the standard (approval and commitment of the parties, identifiable rights, identifiable payment terms, commercial substance, probable collection) are met at the same time.L1
• Which of the following are among the criteria that an arrangement with a customer must meet to be accounted for as a contract under IFRS 15?L1
• To assess whether it is probable that it will collect the consideration to which it will be entitled, what does the entity consider under IFRS 15?L1
• On 1 March 20X1, Nordex and a customer sign an agreement for the supply of sensors. At that date, no sensor has been delivered and no amount has been paid or is due. The contract allows each party to terminate it at any time before the first delivery, without compensating the other. Is there a contract under IFRS 15 at 1 March 20X1?L2
• For a contract with no fixed duration or that renews automatically, the entity applies IFRS 15 to the contractual period in which the parties have present enforceable rights and obligations.L2
• Sportéa offers a club a maintenance subscription for its equipment, renewed automatically each month. Each party may end it at any time, without penalty, with effect at the end of the current month. It is established (legal analysis, case datum) that the enforceable rights and obligations cover only the current month. The club has been a subscriber for three years and Sportéa expects it to remain one. Over what period does Sportéa apply IFRS 15 to this contract?L2
• The criteria for the existence of a contract were met at contract inception. In what case must the entity reassess them?L2
• Sorbel delivers components to Gravex every month under a two-year contract; the criteria for the existence of the contract were met at inception. In the tenth month, Gravex loses its main customer and access to its credit lines: its ability to pay deteriorates significantly (case datum). What must Sorbel do?L3
• Ilvane signs a contract of 1,000,000 with a customer in a market where it has a practice of granting price concessions. It expects (documented judgement, case datum) to accept 800,000 in settlement. The customer has the ability and intention to pay 800,000, but not 1,000,000. On what amount does Ilvane assess collectability?L2
• At contract inception, Lumen concludes that collection of the consideration is not probable (documented judgement, case datum): the arrangement does not meet the criteria for a contract. The customer nevertheless pays a non-refundable deposit of 50,000; Lumen is still required to deliver the machines ordered, which it has not yet delivered. How does it account for the deposit on receipt?L3
• In 20X1, Tessane received 30,000 from a customer under an arrangement that did not meet the criteria for a contract; this amount was recognised as a liability. In 20X2, the contract is terminated; under its terms, the amount received is non-refundable. What does Tessane do in 20X2?L3
• When an arrangement does not meet the criteria for a contract at inception, the entity can never account for it as a contract under IFRS 15, even if the situation changes.L2
• An arrangement with a customer does not meet the criteria for a contract, and the entity has received consideration. In which situations can it recognise this consideration as revenue?L3
• Hélior, a manufacturer of solar panels, receives an order from a new foreign customer confirmed by email exchanges and by telephone, in accordance with the customary practices of its industry. Prices, quantities and payment at 90 days are specified. The customer's latest financial statements show repeated losses and very little cash; no other information makes it possible to assess its intention to pay. The customer offers to pay a non-refundable deposit before delivery. Write a memo stating whether a contract exists under IFRS 15 at inception and how to account for the deposit.L3
• Castelo sells agricultural equipment to a distributor in a region where it has a practice of accepting settlements below the invoiced price, to preserve the business relationship. For a contract of quarterly deliveries over two years, it expects (documented judgement, case datum) to accept about 90% of the contractual price; the distributor has the ability and intention to pay that amount. One year later, the distributor's bank withdraws its credit lines and its payment delays build up. The finance director asks you for a position memo on the assessment of collectability at inception and after this event.L4
• Méridia provides maintenance services to Ostrel every month under a three-year contract that met the criteria at inception. In the eighteenth month, Ostrel's financial position deteriorates sharply; Méridia reassesses collectability and concludes (documented judgement, case datum) that it is no longer probable for the services still to be provided. It nevertheless continues its services and receives 5,000 from Ostrel in the nineteenth month for that month's services, all earlier invoices having already been settled; its performance obligations for the following months remain and the contract is not terminated. How does Méridia account for the 5,000 received?L4