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

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

IFRS technical expert, financial consultant.

When and how, is revenue recognized?

Revenue is recognized when POs are satisfied. This occurs, either:

1. Over time, i.e. gradually;


2. At a point in time, on a specific date.

The standard’s primary approach is to determine whether there are indications that the PO is satisfied over time. If none are found, then the POs are taken to be satisfied at a point in time.

If any of the below mentioned criteria are met, a PO is satisfied, and revenue is recognized, over time.

  1. The customer simultaneously receives and consumes the benefits provided by the reporting entity’s performance as the entity performs e.g. cleaning services.

  2. The reporting entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced, e.g. constructing a shopping mall at the request of the customer.

  3. The reporting entity’s performance does not create an asset with an alternative use to the reporting entity and the entity has an enforceable right to payment for performance completed to date, e.g. rendering of audit services, constructing a shopping mall at the request of the customer.

The standard includes a range of techniques to determine progress of POs satisfied over time, which are beyond the scope of this article.

If none of these criteria is met, then revenue is recognized at a point in time. To decide at which point in time that happens, entities, must determine when control of a good is substantially transferred to the customer.

Control conveys the ability to direct the use of, and obtain substantially all of the remaining benefits from the asset.

A non-conclusive list of indicators that control is substantially transferred, is to be found here:

  • The reporting entity has a right to payment for the asset transferred.

  • The customer obtains the legal title to the asset.

  • The reporting entity has transferred physical possession of the asset.

Link between the classification of a good / service and its revenue recognition.
The roadmap below is applicable when a contract contains several POs.


Example 1 – Goods/services are not distinct
These would be for example, POs that are not distinct “by nature”, i.e. a bundle of services that do not result in an output that can be used until the whole output is finalized. Think of the commissioned construction of custom-made machinery, over time. The customer cannot benefit from the work in progress of the reporting entity, unless the machinery is ready for its intended use or purpose.

The production of the machinery does not result in an output with any usability as the machinery is constructed. The machinery is of any use to the customer, only when it is ready for its intended use/purpose.

IFRS 15 is in this case applied simultaneously with IAS 16 Property, Plant and Equipment at the customer’s end. The reporting entity gradually recognizes revenue over time and the customer work in progress.

As explained in point above, this will be the case, when the asset has no alternative use for the reporting entity, and the entity is entitled to consideration for work performed as per the reporting date, revenue is recognized over time.

Example 2 – Goods are distinct and recognized at a point in time
Impitech enters into a contract with Global Merchant bank, to deliver the new SAP license, 300 laptops and undertake after sales service for 36 months.

The contract includes 3 POs:

  • Delivery of the SAP license.

  • Delivery of the 300 laptops.

  • Rendering of after sales service.

The first 2 POs will be recognized at a point in time most probably simultaneously, but not necessarily so:

  • If Impitech did not undertake the obligation to integrate them on delivery of the laptops, and the difference in timing of satisfaction of the two POs is substantive, revenue will be recognized as each PO is satisfied, e.g. for the transfer of control of the laptops upon their delivery, and say, 2 months later, for the installation of SAP, upon its occurrence. For both POs, revenue will be recognized at a point in time, in different timeframes.

  • If Impitech undertook the obligation to integrate the two POs, revenue for both would be recognized only on delivery of laptops with fully installed SAP. Again, for both POs revenue will be recognized at a point in time, however in this case, simultaneously.

After sales service, is part of the same bundle. But this PO has the same pattern of transfer to the customer and is rendered gradually, i.e. say, in equal proportions every month, i.e. is to be recognized over time.

Example 3 – Services are distinct and recognized over time
Telecom SA enters into a contract with Global Merchant bank, to render the following services on a monthly basis, between July 2019 and June 2021 to 230 of Global Merchant bank’s employees which are mobile phone subscribers:

  • 16 GB data per month.

  • 800 call minutes to all mobile networks, per month.

  • 200 SMSs per month.

Although these are distinct POs, as they both can be used independently from each other and they are separately mentioned in the contract, Telecom SA will most likely opt to recognize revenue over time for all of them as a practical expedient, as service rendering to the bank has the same pattern of transfer each month.

Queries, comments, are welcome at [email protected]

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