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

Athens, January 2019

Chris Ragkavas, BA, MA, FCCA, CGMA
IFRS technical expert, financial consultant.

The existence of a material right

The standard addresses the treatment of a sensible area of revenue recognition, related to services or goods seemingly given free of charge. I’d like to remind you at this stage that the standard does not allow zero recognition for the satisfaction of any performance obligation, irrespective of the contractual provisions. In simple words, for every obligation satisfied either at point in time, or over time, the standard necessitates revenue recognition, so part of the total transaction price must be allocated to every performance obligation, irrespective of whether the contractual provisions stipulate that one or more of them are to be given free of charge. A prerequisite for this price allocation to every performance obligation, is that there is a clear connection between the performance obligation(s) and the contract itself. I am clarifying this issue, below.

What is a material right?

If, in a contract, an entity grants a customer the option to acquire additional goods or services at a discount -on top of the regular discounts- or free of charge, that option gives rise to a performance obligation in the contract, if it provides a material right to the customer that it would not receive without entering into that contract.

Example 1 – Α material right exists

Momma sell an excavator to Specter for $100,000, on 31/12/2019, their year-end. Based on this transaction price, Specter is entitled to the right to purchase at a discount of 40%, any additional goods of their preference, until 30/04/2020.

Momma estimate that Specter will purchase machinery and tools up to $40,000, and there is a 65% chance that this will occur within the allowable time. Therefore, the material right stand-alone selling price is $40,000 x 65% x 40% = $10,400.

The transaction price is allocated to the performance obligations, according to the stand-alone selling price of each PO.


$ $
Excavator 100,000 90,580
Discount given 10,400 9,420
Total 110,400 100,000

The essence of this transaction, is that Momma agree with Specter on two and not one performance obligations, for which Specter is charged on 31/12/2019, for a total consideration of $ 100,000. There is a clear link between the purchase of the excavator and the additional purchases to be potentially made by Specter, at a discount. So although Specter is contractually charged for the excavator only, through this charge, they obtain the right to make additional purchases in 2020.


  • Part of the total $ 100,000 will be recognized upon satisfaction of the performance obligation related to the excavator in 2019;
  • The remaining part will be recognized in 2019 at the earlier of Specter proceeding with the additional purchases, and 30/04/2020.


Trade receivables 100,000
Revenue             90,580
 Contract liability 9,420

At the earlier of Specter purchasing the additional goods and 30/04/2020:

Contract liability 9,420
Revenue 9,420

Example 2 – A material right does not exist

Businesscom telecommunications, offer to their mobile network subscribers, the opportunity to purchase additional SMS and data transfer services, in preference to non-subscribers for the month of September and October 2020. The additional performance obligations will not be discounted.

In this case, although there is a contractual link between the additional performance obligations and the subscription contract, as these POs are not given free of charge, or even at a discount, no material right exists. 

Example 3 – A material right does not exist

Businesscom awards 2  GBs and 50 SMS free of charge between July and August each year, to a selection of customers, randomly, not based on previous consumption, neither as part of a contractual commitment, simply for marketing purposes.

In this case, too, there is no material right, as although these POs are given free of charge, there is no contractual or constructive obligation to do so, neither is there a link between previous consumption and these POs.

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

Queries, comments, are welcome at [email protected]



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