IFRS 15, Revenue from contracts with customers – Boutique treats on performance obligations and revenue recognition, Part I

Athens, June 2018
Chris Ragkavas, BA, MA, FCCA, CGMA

IFRS technical expert, financial consultant

Performance obligations are contractual commitments that the reporting entity must comply with, in order to be entitled to consideration. Even if a good or service is agreed to be given/rendered free of charge, consideration must be allocated to it. We will deal with this last point, in another article.

How are POs classified?
POs are either:

  1. A good or service (or a bundle of goods or services) that is distinct;

  2. series of distinct goods or services that are substantially the same, and have the same pattern of transfer to the customer. ​

A good or service is distinct, if:

1. The customer can benefit from it on its own or together with other resources that are readily available to the customer (the good / service is capable of being distinct),


2. The entity’s promise to transfer that good or service is separately identifiable from other promises in the contract (the good/service is distinct in the context of the contract).

So, a good or service is distinct in the IFRS 15 context, if it is “by nature” distinct, and be distinguished from other goods/services in the contract.

Example 1 – A series of services that have the same pattern of transfer
Impitech, a software and hardware entity, enter into a contract with Global Merchant bank, to render network continuity services to 340 PCs delivered in June 2018.

Impitech will render the services on a 24/7/365 basis, the services will be substantially the same, and will have the same pattern of transfer to the bank.

When are goods or services separately identifiable in the contract?
This is the case if one or more of the criteria below, are met:

  • The entity does not provide a significant service of integrating the good or service with other goods or services promised in the contract into a bundle of goods or services.

  • The good/service does not significantly modify or customize another good or service promised in the contract.

  • The good/service is not highly interrelated with, or dependent on other goods or services promised in the contract. For example, the fact that non-purchase of a good/service does not adversely affect the delivery of the other goods/services included in the same contract is an indication than the goods/services are not highly interrelated.

Example 2 – Distinct goods / services, not a series
Impitech enter into a contract with Global Merchant bank, to deliver:

  • 2,000 new laptops.

  • The latest SAP version.

Both the tangible goods and the intangible are distinct “by nature” as they can be used alone or in combination with other resources available at the bank’s end. For example, the laptops could be used by the bank even without the latest SAP version, assuming for example that the bank owns a previous SAP version. Timing of delivery of the laptops and installation of SAP may, or may not be identical.

Assuming Impitech does not undertake any integration/installation service, the two goods are separate POs, and revenue will be recognized by Impitech when these POs are satisfied.

If Impitech have undertaken the obligation to install SAP in the laptops and make sure both hardware and software are fully operational, then the two POs are not separately identifiable in the contract, and revenue will be recognized only when the integration will have been completed.

Determining this may have a material effect as to when revenue will be recognized.

Revenue can be recognized in two ways, as we will see in Part II:

  • Over time;


  • At a point in time.

PO: performance obligation.
TP: transaction price.
SSP: stand-alone selling price.

Queries, comments, are welcome at: [email protected]

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