Transfer of control and obligations satisfied over time

Learning objectives

• Explain the notion of control of an asset: the ability to direct its use and obtain substantially all of the remaining benefits from it.L1, L2
• Determine whether an obligation is satisfied over time: the customer simultaneously receives and consumes the benefits, the performance creates or enhances an asset controlled by the customer, or the asset has no alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.L2, L3, L4

Normative references

• IFRS 15 §31The entity recognises revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to the customer; an asset is transferred when (or as) the customer obtains control of it.
• IFRS 15 §32For each performance obligation, the entity determines at contract inception whether it is satisfied over time (paragraphs 35-37) or at a point in time (paragraph 38); if the criteria for satisfaction over time are not met, the obligation is satisfied at a point in time.
• IFRS 15 §33Control of an asset is the ability to direct its use and obtain substantially all of the remaining benefits from it, including the ability to prevent other entities from doing so. The benefits are the potential cash flows (inflows or savings in outflows) that can be obtained directly or indirectly, for example by using, consuming, selling, exchanging, pledging or holding the asset.
• IFRS 15 §35Control transfers over time, and revenue is recognised over time, if one of the following criteria is met: (a) the customer simultaneously receives and consumes the benefits of the entity's performance as the entity performs; (b) the performance creates or enhances an asset that the customer controls as it is created or enhanced; (c) the performance creates an asset with no alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.
• IFRS 15 §36An asset has no alternative use to the entity if the entity is either restricted contractually from readily directing it for another use during its creation or enhancement, or limited practically from doing so in its completed state. The assessment is made at contract inception and is revised only if there is an approved contract modification that substantively changes the performance obligation.
• IFRS 15 §37To assess the enforceable right to payment for performance completed to date (criterion 35(c)), the entity considers the terms of the contract and applicable law. That right must, at all times throughout the duration of the contract, entitle it to an amount that at least compensates it for performance completed to date if the contract is terminated by the customer or another party for reasons other than the entity's failure to perform as promised.
• IFRS 15 §B1The application guidance (Appendix B) is organised into topics: performance obligations satisfied over time, methods for measuring progress, sales with a right of return, warranties, principal versus agent considerations, customer options for additional goods or services, unexercised rights, non-refundable upfront fees, licensing, repurchase agreements, consignment arrangements, bill-and-hold arrangements, customer acceptance and disaggregation of revenue. The appendix is an integral part of the standard.
• IFRS 15 §B2Restates, in accordance with paragraph 35, the three criteria for recognition over time (simultaneous receipt and consumption, customer control of the asset created or enhanced, no alternative use with an enforceable right to payment) and refers for each to the corresponding application guidance (B3-B4, B5, then B6 to B13).
• IFRS 15 §B3For some types of performance obligations, in particular routine or recurring services (for example, cleaning), it is evident that the customer simultaneously receives and consumes the benefit as the entity performs, which meets criterion 35(a).
• IFRS 15 §B4When the analysis is not evident, criterion 35(a) is met if another entity taking over the remaining performance would not need to substantially re-perform the work completed to date. For this test, the entity disregards potential contractual or practical limitations on such a transfer and presumes that the other entity would not have the benefit of any asset that it still controls.
• IFRS 15 §B5For criterion 35(b), the entity applies the principles of control (31 to 34 and 38) to the asset being created or enhanced, which may be tangible or intangible (for example, work in progress).
• IFRS 15In assessing whether an asset has an alternative use to the entity, the effects of contractual restrictions and practical limitations on its ability to readily direct the asset for another use, for example selling it to a different customer, are considered; the possibility of the contract being terminated is not relevant.
• IFRS 15A contractual restriction prevents an alternative use only if it is substantive, i.e. if the customer could enforce its rights to the promised asset if the entity sought to direct it for another use. It is not substantive when the asset is largely interchangeable with other assets that could be transferred to another customer without breaching the contract and without incurring significant additional costs.
• IFRS 15 §B8A practical limitation on directing an asset for another use exists if the entity would incur significant economic losses to do so, either because of significant costs to rework the asset or because it could only sell it at a significant loss; this may be the case for assets with customer-specific design specifications or located in remote areas.
• IFRS 15 §B9An enforceable right to payment requires that, throughout the contract, the entity can obtain at least compensation for performance completed to date if the customer or another party terminates the contract for reasons other than the entity's failure to perform. That compensation must approximate the selling price of the goods or services transferred to date (for example, costs incurred plus a reasonable profit margin), not merely the entity's lost profit. The reasonable margin need not equal the margin expected if the contract were carried out in full: the entity must be able to obtain either a share of the expected margin that reasonably reflects how far it had performed before termination, or a reasonable return on its cost of capital (or its usual operating margin on similar contracts) where the contract-specific margin exceeds the return it usually earns.
• IFRS 15 §B10The right to payment for performance completed to date does not have to be a present, unconditional right: often the entity has an unconditional right only when an agreed milestone is reached or the obligation is fully satisfied. To assess the right, the entity considers whether it would have an enforceable right to demand or keep payment for the performance completed if the contract were terminated early for a reason other than its own failure to perform.
• IFRS 15 §B11A customer may be able to terminate the contract only at specified times, or not at all. If the customer acts to terminate when it has no right to do so at that time (including by failing to perform as promised), the contract or the law may allow the entity to keep transferring the promised goods or services and to require the promised consideration; the entity then has a right to payment for performance completed to date.
• IFRS 15 §B12Whether a right to payment exists and is enforceable is assessed in the light of the contract and of any legislation or case law that may supplement or override it: a right granted by law or administrative practice, case law depriving similar terms of effect, or a customary practice of not enforcing such rights that makes the right unenforceable in that legal environment. Waiving the right from time to time does not remove it if it remains enforceable in the contract concerned.
• IFRS 15 §B13The payment schedule in the contract does not necessarily show that the entity has an enforceable right to payment for performance completed to date: it sets when and how much is payable, but the contract may, for example, provide that consideration received is refundable for reasons other than the entity's failure to perform.

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

27 questions

• In what order does the five-step teaching approach apply the core principle of IFRS 15?L1
• Which of the following statements are consistent with the core principle of IFRS 15?L2
• On 20 December 20X1, Fervane receives full payment from its customer for a machine that it will deliver, and of which the customer will obtain control, on 15 January 20X2. Fervane's reporting date is 31 December. When does it recognise the revenue from this sale?L2
• Revenue from a contract is recognised as soon as it is signed, since the customer has committed to pay.L1
• Control of an asset includes the ability to prevent other entities from directing its use and obtaining its benefits.L1
• Under IFRS 15, what characterises a customer having control of an asset?L1
• A performance obligation that meets none of the criteria for recognition over time is satisfied at a point in time.L2
• Primevère enters into a contract for custom manufacturing. When must it determine whether the performance obligation is satisfied over time or at a point in time?L2
• Which of the following situations each constitute, on their own, a criterion for recognising revenue over time?L2
• Nettalis cleans a customer's offices every evening for one year. How should its performance obligation be characterised?L2
• Fergane manufactures in its plant a machine designed for a single customer, with no alternative use to it. The contract gives it no right to payment if the customer terminates before delivery. It is accepted (case data) that the customer neither receives nor consumes any benefit during manufacture and does not control the machine while it is being built. What conclusion should be reached?L2
• To assess whether the performance creates or enhances an asset controlled by the customer, the asset concerned may be tangible or intangible, for example work in progress.L2
• The carrier Routhéa transports a customer's goods by truck over a 1,200 km route. The contract prohibits any subcontracting. If another carrier had to take over the route halfway, it would not need to repeat the first half of the journey. How should Routhéa's performance obligation be analysed?L3
• Bâtisseurs de Lirac extends a customer's factory on the customer's land. After analysis (case data), the customer controls the extension as it is built: it can change its design, deny third parties access to it and obtain its benefits, the part built belonging to it as construction proceeds. How should revenue be recognised?L3
• The assessment of whether an asset has no alternative use to the entity is performed again at each reporting date, to reflect market developments.L3
• Cassiopée manufactures equipment under a firm contract. Its internal auditor argues that the equipment has an alternative use, since if the customer terminated the contract, Cassiopée could sell it to someone else. Which principle applies?L3
• Pompéa mass-produces standard pumps. A contract assigns to a customer 50 pumps identified by their serial numbers, but Pompéa can deliver other identical pumps from its stock to that customer without breaching the contract or incurring significant additional costs. The contract provides a right to payment on termination. It is accepted (case data) that the first two criteria for recognition over time are not met. What do you conclude?L3
• The Haliane shipyard builds a polar research vessel to specifications unique to a scientific institute. To sell it to another buyer, it would have to be reworked at great cost or sold at a significant loss. The contract gives Haliane, at all times, if the institute terminates for reasons other than Haliane's failure to perform, the right to recover the costs incurred plus a reasonable margin (an enforceable right according to a legal opinion, case data). How should revenue be recognised?L3
• A clause that, if the customer terminates, only allows the entity to obtain compensation for its potential loss of profit is enough to establish an enforceable right to payment for performance completed to date.L3
• Olbrane's contract provides for invoicing the customer only on completion of the work. If the customer terminates for reasons other than Olbrane's failure to perform, Olbrane is nevertheless entitled, at all times, to the costs incurred plus a reasonable margin. The CFO considers that there is no right to payment for performance completed to date, as there is no present right to invoice. What is your view?L3
• Ténarès develops bespoke software with an expected margin of 35%, well above the operating margin of 12% it usually earns on similar contracts. If the customer terminates for reasons other than Ténarès's failure to perform, the contract entitles it, at all times, to the costs incurred plus 12%. The software has no alternative use to Ténarès (case data). Is there an enforceable right to payment for performance completed to date?L4
• Mérindel manufactures custom lift cars, with no alternative use to it. Its contracts provide for a right to payment of the costs incurred plus a reasonable margin if the customer terminates. A legal opinion indicates, however, that in the country concerned the courts consistently deprive such clauses of effect. It is accepted (case data) that the first two criteria for recognition over time are not met. What do you conclude?L4
• Quillane is assessing the existence and enforceability of its right to payment for performance completed to date. Which elements must it consider?L4
• Hydrelle designs and manufactures in its plant a turbine adapted to the characteristics of a specific dam; adapting it to another site would require a costly redesign, and reselling it as is would only be possible at a significant loss. If the customer terminates for reasons other than Hydrelle's failure to perform, the contract provides at all times for payment of the costs incurred plus a reasonable margin, a right confirmed by a legal opinion (case data). The turbine will remain in the plant until it is shipped. The CFO proposes recognising revenue on delivery, on the grounds that the customer does not hold the turbine during manufacture. Write a reasoned memo on the pattern of revenue recognition.L4
• The developer Belcastel sells off-plan a specific flat in a building under construction. The contract prohibits it from transferring that unit to another buyer, and the buyer could enforce its rights to that unit if it were transferred. According to a legal opinion, the contract and the law of the country give Belcastel, at all times, if the buyer terminates for reasons other than the developer's failure to perform, the right to obtain the price of the work performed, including a margin. In recent years, Belcastel has waived that right twice, for commercial reasons, out of thousands of contracts. The statutory auditor questions the recognition over time applied. Formulate and justify your opinion.L4
• When a performance obligation is satisfied at a point in time, the entity sets that point at the moment the customer obtains control of the asset, using indicators such as physical possession or customer acceptance.L1
• Under IFRS 15, the decisive criterion for recognising revenue at a point in time is the transfer of the significant risks and rewards of ownership; the other indicators are merely secondary.L3