The answer to this question is potentially, yes. One of the key changes introduced by IFRS 15 Revenue from Contracts with Customers is that revenue recognition is now based on the transfer of control over goods or services to a customer, rather than just the transfer of risks and rewards. For many companies this is resulting in changes to the pattern of revenue recognition from over time to a point in time, or vice versa (less common). Where point in time recognition remains appropriate, changes to the timing of the “point in time” might arise.
All entities adopting IFRS 15 need to assess how the new requirements apply to them and update how their revenue recognition policies are described in the financial statements.
Over time or at a point in time
Under IFRS 15, an entity must determine for each performance obligation whether control is transferred over time or at a point in time. If control is not transferred over time, the default position is that the performance obligation is satisfied at a point in time.
Revenue recognised over time
IFRS 15 provides three criteria, at least one of which must be met to qualify for revenue recognition over time.
Comments and additional guidance
- The customer simultaneously receives and consumes the economic benefits provided by the vendor’s performance
- Typically applies to contracts for services
- The concept of control of an asset applies because services are viewed as an asset (momentarily) when they are received and used or consumed
- Consider whether another vendor would need to substantially re-perform the work completed to date
- Cleaning services
- Transportation services
- Some professional services
- The vendor creates or enhances an asset controlled by the customer
- Typically applies when an asset (tangible or intangible) is being constructed on the customer’s premises
- A building constructed on land owned by the customer
- Customised software written into a customer’s existing IT infrastructure
- (1) The vendor’s performance does not create an asset for which the vendor has an alternative use; and (2) The vendor has an enforceable right to payment for performance completed to date
- Typically applies to construction/development of assets to customer specifications
- Consider the terms of the contract and any relevant laws or regulations
- Construction and real estate (developers)
- Manufacturing/engineering contracts for customised products/assets
- Some advertising and professional services
- Software development projects hosted on the vendor’s servers while under development
In practice, it is not always straightforward to determine which of the ‘over time’ criteria, if any, are relevant and whether they are satisfied. For example, in the case of a professional services engagement:
- Does the customer receive a service or goods? Payroll processing services could be services that the customer receives and benefits from throughout the contract and may qualify for over time revenue recognition under the criteria in (a).
- Is the objective of the engagement to produce a report? The customer is unlikely to benefit until the report is delivered. In such cases, the entity needs to consider the criteria in (c) or revenue might need to be recognised at a point in time when the report is completed.
Where (c) applies, a careful review of the contract terms, and the legal frameworks that govern the transaction, is required. There is often considerable judgement involved in assessing:
- Whether the asset can be sold to another customer, and
- Whether there is a right to payment for both costs incurred to date and a reasonable profit margin at all times throughout the contract.
Revenue recognised at a point in time
When recognising revenue at a point in time, entities need to consider when the customer obtains the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. IFRS 15 provides a list of indicators that control has passed, including if the customer has:
- A present obligation to pay
- Physical possession of the asset(s)
- Legal title
- Risks and rewards of ownership
- Accepted the asset(s).
While risks and rewards continues to be an indicator, entities moving from IAS 18 to IFRS 15 should consider whether a different indicator or indicators could more accurately depict the transfer of control for the asset in question, which could change the point in time when revenue is recognised. For example, some consumer product manufacturers and retailers ship goods on “Free On Board (FOB) shipping point” terms, but retain a degree of risk during shipment and may conclude that control is transferred (based on legal title, right to payment, the customer’s right to redirect the goods) earlier than risks and rewards and may recognise revenue earlier under IFRS 15.
For help and advice on revenue recognition issues please get in touch with your usual BDO contact or Tony Perkins.
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