Step 1: Identify the contract with customers

A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations. The object of identifying a contract with customers is to establish the enforceable rights and obligations. Therefore, IFRS 15 only applies to valid contracts that meet specified criteria. This step also identifies when contracts should be combined and recorded as one contract and provides guidance for the accounting for contract modifications.

Step 2: Identify the performance obligations in the contract

At contract inception, goods or services promised in a contract are identified as separate performance obligations when the goods or services are distinct. However, to make IFRS 15 more practical, a series of distinct goods or services is also identified as a performance obligation when the goods or services are substantially the same and have the same pattern of transfer to the customer.

A contract with a customer normally explicitly states the goods or services that are promised to be transferred to a customer. However, the performance obligations identified in a contract are not limited to the goods or services that are explicitly stated in that contract. Promises implied by customary business practices, published policies or specific statements are also included if those promises create a valid expectation that goods or services will be transferred to the customer.

Performance obligations only include activities in a contract that transfers goods and services to the customer. Administrative tasks to fulfil or set up a contract will therefore not be separate performance obligations. IFRS 15 includes the following examples of promised goods and services:

1. Sale of goods produced by an entity.
2. Resale of goods purchased.
3. Resale of rights to goods or services such as tickets.
4. Services performed.
5. A stand‐ready service to provide goods or services such as insurance contracts.
6. Making goods or services available for a customer to be used.
7. Acting as an agent for another party to transfer goods and services.
8. Granting rights to goods or services linked to original good and services.
9. Constructing, manufacturing or developing an asset on behalf of a customer.
10. Granting licences.
11. Granting options to purchase additional goods or services.

Distinct performance obligations

A contract includes promises to transfer goods or services to a customer. If those goods or services are distinct, the performance obligation is accounted for separately. A good or service is regarded as distinct if the following two criteria are met:

1. The customer can benefit from the good or service on its own or together with other readily available resources; and
2. The promise to transfer the good or service to the customer is separately identifiable from other promises in the contract, which means that the promised goods and services are distinct in contents of the contract.

A customer is regarded as benefiting from a good or service if the good or service could be used, consumed or sold for an amount that is greater than scrap value or otherwise held to generate economic benefits. A customer could benefit from goods and services on its own or in conjunction with other readily available resources. A readily available resource is a good or service that is sold separately or a resource that the customer has already obtained from the entity or from other transactions or events.

Separately identifiable is assessed, within the context of the contract, by determining whether each of the goods or services is transferred individually or alternatively transferred as a combined item or items to which the promised goods or services are inputs. The following factors identify whether goods and services are not separately identifiable:

1. A significant service of integrating the good or service with other goods or services promised in the contract is provided and therefore a combined output is provided.
2. The good or service does significantly modify or customise another good or service promised in the contract (or is modified or customised by other goods and services).
3. The good or service is highly interdependent on or highly interrelated with other goods or services promised in the contract.

The effect of the factors is that each good and service is significantly affected by the other goods and services.

When promised goods or services are not distinct, they are combined until a bundle of goods or services is identified that is distinct. This could result in an entity combining all the goods or services promised in a contract as a single performance obligation.

A series of distinct goods and services

This option is included to limit the overidentification of separate performance obligations in a contract when the goods and services are substantially the same and have the same pattern of transfer to the customer. IFRS 15 determines that a series of distinct goods or services has the same pattern of transfer to the customer if both of the following criteria are met:

1. Each distinct good or service in the series of goods and services is regarded to be a performance obligation satisfied over time; and
2. The same method would be used to measure the progress to completion of each distinct good or service in the series to the customer.

Step 3: Determine the transaction price

The transaction price is the amount of consideration that an entity expects to be entitled to in exchange for transferring promised goods or services to a customer. The transaction price excludes amounts collected on behalf of others. In determining the transaction price, the terms of the contract and past customary business practices are considered. Furthermore, it is assumed that the goods and services will be transferred as promised and that the contract will not be cancelled, renewed or modified.

The amount of consideration could be a fixed or variable amount and could be paid in cash or otherwise. If the consideration is not fixed the amount of consideration should be estimated limited to a specific constraint for variable consideration. In determining the transaction price, the nature, timing and amount of consideration are also considered, including the possible existence of a significant financing component in the contract.

At the end of each reporting period the estimated transaction price is reconsidered and updated with circumstances present at the end of the reporting period and changes in circumstances during the reporting period.

Variable consideration

Variable amounts in a contract are estimated to determine the amount entitled under the contract, including consideration contingent on the occurrence of a future uncertain event. A variable consideration is, however, not included in the transaction price if the uncertainty regarding the amount is too uncertain (refer to constraining estimates of variable consideration below).

Variable fees arise when an entity provides goods or services for a consideration that varies based on the occurrence or non‐occurrence of a future event. The timing of recognition of variable fees may now change and need to be recognised sooner as a result of IFRS 15. Revenues for industries like construction, asset management, technology, life sciences, entertainment and media and engineering may have a significant portion of revenue that is made up of variable fees, such as performance bonuses and other forms of contingent consideration.

Per the previous IFRS standards, such industries had to delay revenue recognition for variable fees until they were earned, received or the contingency resolved. Based on the new standard, revenue may be recognised earlier if an entity can point to experience with similar arrangements. As a result of this, a new process may need to be established to estimate these variable amounts each year.

The consideration promised could vary because of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties or other similar items, including consideration contingent on the occurrence or non‐occurrence of a future event such as right of return options or performance bonuses. Right of return is specifically discussed later under specific transaction. Variability could be explicitly stated in the contract, or could result from customary business practices, published policies, specific statements or other facts and circumstances that a price concession will be granted.

The amount of variable consideration is estimated by using the following two methods depending on which method better predicts the amount of consideration entitled to:

1. The expected value: the sum of probability‐weighted amounts in a range of possible consideration amounts. This method could be used to estimate the amount of variable consideration for contracts with similar characteristics.
2. The most likely amount: the single most likely amount in a range of possible outcomes. This method could be used to estimate the amount of variable consideration if only two possible outcomes exist.

The method chosen should be applied consistently throughout the contract. All information (historical, current and forecast) that is reasonably available, including a reasonable number of possible consideration amounts, should be considered. These considerations are normally based on information used by management during bidding and establishing prices for promised goods or services.

Constraining estimates of variable consideration

IFRS 15 deals with the uncertainty relating to variable consideration by limiting the amount of variable consideration that can be recognised. Specifically, variable consideration is only included in the transaction price if, and to the extent that, it is highly probable that its inclusion will not result in a significant revenue reversal in the future when the uncertainty has been subsequently resolved.

Both the likelihood and the magnitude of the revenue reversal should be considered in assessing the constraint. IFRS 15 identifies the following factors that could increase both the likelihood and the magnitude of a revenue reversal:

1. The amount of consideration is highly susceptible to factors outside the entity's influence, such as volatility in a market, the judgement or actions of third parties, weather conditions and a high risk of obsolescence.
2. The uncertainty about the amount of consideration is not expected to be resolved for a long period of time.
3. The experience (or other evidence) with similar types of contracts is limited or has limited predictive value.
4. A practice exists of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances.
5. The contract has a large number and broad range of possible consideration amounts.

The existence of a significant financing component in the contract

An adjustment for the time value of money is made to a transaction price for significant effects of financing. As a practical expedient, a finance component need not be identified when the period between the transfer of promised goods or services and the payment therefor is expected to be less than 12 months.

Time value of money plays an important role in IFRS 15. This is especially prevalent when a contract contains explicitly or implicitly a significant financing component as the transaction price will be affected. As a result, operational challenges associated with measuring the time value of money might be faced. In addition, judgement will play a role in deciding what is considered to be significant.

The objective of adjusting the amount of consideration for a significant financing component is to recognise revenue at an amount that reflects the cash price on the date of transfer. Therefore, all facts and circumstances are considered to assess whether a contract contains a significant financing component. Specifically, the following are considered to identify a significant financing component:

1. The difference between the identified consideration and the cash selling price of the promised goods or services.
2. The combined effect of both the expected period between the transfer of promised goods or services and the payment therefor, and the prevailing interest rates in the relevant market.

IFRS 15 identifies that a significant financing component would not exist in the following cases:

1. The goods or services are paid in advance and the timing of the transfer of those goods or services is at the discretion of the customer.
2. A substantial amount of the consideration is variable, and the amount or timing of that consideration varies based on the occurrence or non‐occurrence of a future event that is not substantially within the control of the customer or the entity.
3. The difference between the promised consideration and the cash selling price arises for reasons other than the provision of financing and the difference between those amounts is proportional to the reason for the difference. An example is a construction contract where a deposit is paid upfront to protect the risk of non‐performance by the customer.

The discount rate is determined at contract inception and not updated for changes in interest rates or other circumstances. The discount rate should reflect the applicable discount rate between the entity and other customers in a separate financing transaction. Such a rate reflects the credit characteristics of the customer receiving the finance and considers any collateral or security and assets transferred in the contract. The rate might also be determined by identifying the rate that discounts the contract payments to the normal cash price.

In the statement of comprehensive income, the effect of financing is presented separately from revenue from contracts with customers. Interest revenue or interest expense is recognised only if a related contract asset or liability is recognised for unpaid amounts.

Non‐cash consideration

Non‐cash consideration is measured at fair value. However, when the fair value cannot reasonably be estimated, the non‐cash consideration is measured indirectly by reference to the stand‐alone selling price of the goods or services provided. Non‐cash consideration could be variable regarding the form of the consideration (such as share payments) or for other reasons such as performance measures. In the latter case the requirements for variable consideration and any possible uncertainty constraint (discussed above) need to be considered.

When a customer contributes goods or services (such as materials, equipment or labour) to facilitate the fulfilment of the contract, an assessment is made whether the entity obtains control of the contributed goods or services. If control is obtained, the contributed goods and services are accounted for as non‐cash consideration received from the customer.

Consideration payable to a customer

Sometimes consideration might be payable to a customer. Consideration payable to a customer might also include credit or other items (such as a coupon or voucher) that can be applied against amounts owed to the customer. This could also include other parties that purchase the entity's goods or services from the customer.

Such consideration payable to a customer is normally regarded as a reduction of the transaction price and resultant revenue, unless the payment to the customer is for a distinct good or service transferred from the customer. The requirements for variable consideration and any constraint are also applicable to consideration payable to a customer.

When the consideration payable to a customer is for a distinct good or service from the customer it is regarded as a normal purchase transaction. Any excess of the consideration payable to the customer over the fair value of the distinct good or service is accounted for as a reduction of the original transaction price. However, if the fair value of the good or service received from the customer cannot be reasonably estimated, the full amount is regarded as a reduction of the transaction price.

Any reduction in the transaction price as a result of a consideration payable to a customer is recognised when the latter of the following events occurs:

1. Revenue is recognised for the transfer of the related goods or services to the customer.
2. Payment is made or promised to the customer.

Changes in the transaction price

The basic principle is that a change in the transaction price after contract inception is allocated to performance obligations on the same basis as at contract inception. The transaction price is therefore not reallocated to subsequent changes in stand‐alone selling prices. This is regarded as a change in accounting estimates that is recognised when the change happens.

A change in the transaction price is allocated to some of the performance obligations or a series of distinct goods or services based on the guidance, discussed in Step 4, to allocating variable consideration to some performance obligations.

A change in the transaction price from a contract modification is accounted for as a contract modification discussed in Step 1. However, for a change in the transaction price that occurs after a contract modification, the issue is whether the modification would be accounted for as a separate contract or not. If the modification is accounted for as a separate contract, any change in the transaction that refers to an amount of variable consideration, promised before the modification, is allocated to the performance obligation identified in the contract before the modification. If the modification is not accounted for as a separate contract, the change in the transaction price is allocated to the performance obligations identified in the modified contract.

Step 4: Allocate the transaction price

The objective in IFRS 15 is that the transaction price is allocated to each performance obligation in an amount that depicts the amount of consideration expected to be entitled to in exchange for transferring the promised goods or services to the customer. The requirements also specify when an entity allocates variable consideration to only some of the performance obligations in a contract.

Allocation based on stand‐alone selling prices

The transaction price is allocated to different performance obligations in the contract by reference to their relative stand‐alone selling prices. If a stand‐alone selling price is not directly observable, it needs to be estimated.

The stand‐alone selling price is the price at which an entity would sell a promised good or service separately to a customer. The best evidence of a stand‐alone selling price is the observable price used in similar circumstances to similar customers. Alternatively, a contractually stated price or a list price for goods and services may be an indication of the stand‐alone selling price.

When estimating a stand‐alone selling price, all information is considered that is reasonably available to the entity. In doing so, the use of observable inputs is maximised. Estimation methods are applied consistently in similar circumstances.

Suitable methods for estimating the stand‐alone selling price might include the following:

1. Adjusted market approach: Evaluate the market in which the goods or services are sold and estimate the price that a customer in that market would be willing to pay for those goods or services. This approach might also include using prices of competitors for similar goods or services and adjusting those prices as necessary to reflect the entity's costs and margins.
2. Expected cost plus a margin approach: Forecast the expected costs of satisfying a performance obligation and adding an appropriate margin for that good or service.
3. Residual approach: Estimate the stand‐alone selling price by reference to the total transaction price less the sum of the observable stand‐alone selling prices of other goods or services promised in the contract.

The use of the residual approach is limited to cases of uncertainty. Therefore, the residual approach may only be used in any of the following cases:

1. The same good or service is sold to different customers for a broad range of amounts resulting in the selling price being highly variable and the stand‐alone selling price not being determinable from past transactions or other observable evidence.
2. The selling price is not established for that good or service that has not previously been sold on a stand‐alone basis.

In highly variable and uncertain cases the methods may be combined for a contract to estimate the stand‐alone selling prices for different performance obligations depending on the uncertainty and variability. However, the objective of depicting the expected amount of consideration should still be achieved.

Allocation of a discount

Sometimes the transaction price may include a discount. A discount is granted for a bundle of goods or services if the sum of the stand‐alone selling prices of the promised goods or services in the contract exceeds the promised consideration in a contract. Normally the overall discount is allocated between the performance obligations in a contract on a relative stand‐alone selling price basis. However, in some circumstances it may be appropriate to allocate the discount to certain performance obligations in the contract when there is observable evidence that the discount relates to specific performance obligations in the contract.

A discount is allocated to only specific performance obligations in the contract if all of the following criteria are met:

1. Each distinct good or service in the contract is sold regularly on a stand‐alone basis.
2. A bundle (or bundles) of some of those distinct goods or services is also regularly sold on a stand‐alone basis at a discount.
3. The discount attributable to each bundle of goods or services is substantially the same as the discount in the contract and provides observable evidence of the performance obligation(s) to which the discount belongs.

The discount is allocated to certain performance obligations in the contract before using the residual approach to estimate the stand‐alone selling price of any good or service.

Allocation of variable consideration

Variable consideration that is promised in a contract may be attributable to the entire contract or to a specific part of the contract. A variable amount is allocated to a specific part of a contract if the terms of a variable payment relate specifically to the satisfaction of specific performance obligation. The allocation of the variable must also meet the objective of depicting the amount of consideration expected to be entitled to for transferring the promised goods or services to the customer.

Step 5: Recognise revenue when performance obligations are satisfied

Based on the principle of control, revenue is recognised when an entity's performance obligation is satisfied by transferring a promised good or service to a customer. A performance obligation could either be satisfied over time or at a point in time. The assessment of over time or at a point in time must be done at contract inception for each performance obligation by first assessing the application of over time. If the performance obligation is not satisfied over time it defaults to point in time.

Benefits are transferred to a customer. IFRS 15 assumes that the control of an asset is transferred even if the benefit is immediately consumed. Control of an asset means having the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. Control also includes the ability to prevent others from directing the use of and obtaining the benefits. The benefits of an asset are the potential cash flows (inflows or savings in outflows) that can be obtained directly or indirectly in many ways, such as by:

1. Using the asset to produce goods or provide services.
2. Using the asset to enhance the value of other assets.
3. Using the asset to settle liabilities or reduce expenses.
4. Selling or exchanging the asset.
5. Pledging the asset to secure a loan.
6. Holding the asset.

When evaluating whether a customer obtains control of an asset any agreement to repurchase the asset should be considered (refer to specific transactions discussed later).

Performance obligations satisfied over time

IFRS 15 determines that revenue is recognised over time if one of the following three criteria is met:

1. The customer simultaneously receives and consumes the benefit provided by the entity as the entity performs; or
2. The entity's performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or
3. The entity's performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for the performance completed to date.

Measuring progress towards complete satisfaction of a performance obligation

If a performance obligation is satisfied over time, an entity should select an appropriate measure of progress to recognise revenue over time. The objective of measuring progress is to depict the performance satisfied in transferring goods or services to a customer.

A single method of measuring progress is applied for each performance obligation satisfied over time and the method should be applied consistently to similar performance obligations in similar circumstances. Progress towards completion should be remeasured at the end of each reporting period. Such changes to an entity's measure of progress shall be accounted for as a change in accounting estimate in accordance with IAS 8.

Determining the appropriate method for measuring progress considers the nature of the good or service promised in the contract. Both input and output methods may be used to measure progress to completion.

Performance obligations satisfied at a point in time

If a performance obligation is not satisfied over time, the performance obligation is by default satisfied at a point in time. To determine the point in time when revenue should be recognised, the requirements of control are considered. The control requirements are that the customer has: (1) obtained the ability to direct the use of the asset, and (2) obtained substantially all of the remaining benefits from the asset. Control is also present when the customer could restrict others from using the asset.

Factors which may indicate that control is passed to the customer at a point in time are:

1. The present right to payment for the asset exists: A present right of payment for an asset might indicate that the performance obligation is completed and therefore control is transferred by implication.
2. The customer has legal title to the asset: Legal title may indicate which party controls that asset and therefore could restrict the access of others to those benefits. An asset could still be transferred if legal title is retained solely for protection against failure of customer payment.
3. Physical possession of the asset is transferred: Physical possession of an asset may indicate control is being transferred. However, in repurchase and consignment arrangements, physical possession might not result in the transfer of control.
4. The customer has the significant risks and rewards of ownership of the asset: The transfer of significant risks and rewards of ownership of an asset may indicate that the customer has obtained control. However, additional performance obligations such as maintenance services must be assessed separately.
5. The customer has accepted the asset: Acceptance of an asset by a customer may indicate that control is transferred if the customer obtained the ability to direct the use of the asset and obtain substantially all of the remaining benefits from the asset.

Costs to Fulfil a Contract

Costs incurred to fulfil a contract are in the scope of IFRS 15 if it is not in the scope of another IFRS standard (such as IAS 2 or IAS 16). If not in the scope of IFRS 15, the other IFRS standard is applied. Fulfilment costs in the scope of IFRS 15 are recognised as an asset only if all the following criteria are met:

1. The costs relate directly to a contract or to an anticipated contract that can specifically be identified.
2. The costs generate or enhance resources that will be used in satisfying performance obligations in the future.
3. The costs are expected to be recovered.

Examples of costs that may be incurred to fulfil a contract are direct labour, direct materials, allocation of overheads that relate directly to the contract, costs that are explicitly chargeable to the customer under the contract and other costs that are incurred because of entering into the contract.

The following costs are, however, expenses as incurred:

1. General and administrative costs.
2. Costs of wasted materials, labour or other resources to fulfil the contract that were not reflected in the price of the contract.
3. Costs that relate to past performance being satisfied performance obligations or partially satisfied performance obligations.
4. Costs which cannot be distinguished whether they relate to satisfied or unsatisfied performance obligations.

Amortisation

A contract asset recognised is amortised on a systematic basis consistent with the transfer to the customer of the goods or services to which the asset relates. The amortisation is updated to reflect significant changes in the expected timing of transfer to the customer of the goods or services. Such a change is regarded as a change in accounting estimate in accordance with IAS 8.

Impairment

An impairment loss is recognised in profit or loss to the extent that the carrying amount of a contract asset recognised exceeds:

1. The remaining amount of consideration expected to be received in exchange for the goods or services; less
2. The costs that relate directly to providing those goods or services that have not been recognised already as an expense.

The remaining expected amount of consideration is determined by using the principles for determining the transaction price in Step 3 of the revenue recognition process, excluding the requirements on constraining estimates of variable consideration. The amount is further adjusted to reflect the effects of the customer's credit risk.

A step approach is followed before an impairment loss is recognised for a contract asset, and any impairment loss is recognised for assets related to the contract that are recognised in accordance with another IFRS standard. After applying the impairment test, the resulting carrying amount of the asset is included in the carrying amount of the cash‐generating unit to which it belongs for the purpose of applying IAS 36 (refer to Chapter 13).

Any later reversal of an impairment loss is recognised in profit or loss when the impairment conditions no longer exist or have improved. The new increased carrying amount of the contract asset shall not exceed the amount that would have been determined (net of amortisation) if no impairment loss had been recognised previously.

Customer options for additional goods or services

Customer options for additional goods or services could include sales incentives, customer award credits (or points), contract renewal options or other discounts on future goods or services. The issue is whether the option in the contract creates a separate performance obligation.

The test in IFRS 15 is whether the option creates a material right to the customer, which it would not obtain without entering into that contract. The result of a material right is that the customer effectively pays in advance for future goods or services and therefore a contract liability is created. Revenue for the option could then only be recognised when the future goods or services are transferred or when the option expires.

A material right is not created when the option grants the customer the right to obtain additional goods and services at a price reflecting the stand‐alone selling price. Also, IFRS 15 clarifies that a marketing offer granted to the customer is only subject to IFRS 15 when the option is exercised.

When an option creates a material right, a portion of the total consideration is allocated to the material right based on the stand‐alone selling price of the option. If the stand‐alone selling price for the option is not observable, it should be estimated. The estimation should include any discount the customer is entitled to and adjusted for both:

1. Any discount that the customer could receive without exercising the option; and
2. The likelihood that the option will be exercised.

As a practical alternative the stand‐alone selling price of the option could be determined by allocating the transaction price to the optional goods and services by reference to the goods and services expected to be provided and the corresponding expected consideration. The practical alternative is normally applicable to contract renewals and can therefore only be used when:

1. The customer has a material right to acquire future goods or services.
2. The goods or services are similar to the original goods or services in the contract.
3. The goods and services are provided in accordance with the terms of the original contract.

Customers' unexercised rights

In this section IFRS 15 clarifies different unexercised rights of customers. If a prepayment is received from a customer, a contract liability is recognised for the prepayment. The contract liability is derecognised and revenue recognised when the related performance obligation(s) is satisfied.

When a customer does not exercise all its rights and a non‐refundable contract liability is recognised, a breakage in a contract could occur. An expected breakage in a contract is determined by considering the requirements of constraint estimates of variable consideration, which means that a high probability needs to exist that the breakage identification will not be reversed.

The expected breakage amount identified in the non‐refundable contract liability should be recognised as revenue in proportion to the pattern of rights exercised by the customer. However, if the entity does not expect to be entitled to a breakage amount, revenue is only recognised for the expected breakage amount when the likelihood of the customer exercising its remaining rights becomes remote.

Any consideration received for customers' unexercised rights that are required to be remitted to another party is recognised as a liability and not revenue.

Non‐refundable upfront fees (and some related costs)

Non‐refundable upfront fees could be paid at or near contract inception such as a joining fee at sports clubs. The issue that IFRS 15 clarifies is whether these fees relate to the transfer of any specific promised goods or services and therefore whether revenue could be recognised. An assessment should also be made whether the cost incurred in setting up a contract could be recognised as an asset.

Activities performed by the entity upfront do not always result in a transfer of promised goods and services to the customer. If not, the upfront fee is regarded as a prepayment for future goods and services in the contract. The revenue recognition period recognises that the future goods and services would extend beyond the initial contractual period when the customer has an option to renew the contract and that option provides the customer with a material right.

When the non‐refundable upfront fee relates to a specific good or service, an assessment is made whether the good or service relates to a distinct performance obligation to determine whether revenue could be recognised separately upfront.

A non‐refundable fee may be charged to compensate an entity for costs incurred in setting up a contract. Such activities are also disregarded when measuring progress if they do not satisfy any performance obligations. That is because the setup costs do not depict the transfer of goods or services to the customer.

Licensing

Entities that license their intellectual property to customers will be greatly affected. Licences allow a customer to use an entity's intellectual property such as trademarks, media and copyrights. The issue is to determine whether the licence that transfers to the customer is over time or at a point in time.

A licence could, either explicitly or implied in the contract, be granted with the transfer of goods and services to a customer. Then an assessment should be made whether a licence is a distinct performance obligation. When the licence granted is not distinct from other promised goods or services, the licence and promised goods and services are regarded together as a single performance obligation which is either satisfied over time or at a point in time. IFRS 15 provides the following examples of licences that are not distinct:

1. A licence that forms a component of a tangible good that is integral to the functionality of the good.
2. A licence that the customer can benefit from only in conjunction with a related service. IFRS 15 provides the example of an online service that enables the customer to access content through granting the licence.

When the licence granted is distinct and therefore a separate performance obligation, an assessment is made whether the licence transfers either at a point in time or over time. The nature of the licence, as discussed below, is considered to determine whether the customer is provided with:

1. A right to access the intellectual property as it exists throughout the licence period; or
2. A right to use the intellectual property as it exists at the point in time when the licence is granted.

Determining the nature of the entity's promise

A customer could either obtain the right to access the entity's intellectual property as it exists throughout the licence period, or a right to use the entity's intellectual property as it exists at a point in time when the licence is granted. Revenue would be recognised for a right of access over the licence period and for the right of usage at a point of time when the licence is granted. The right to access an intellectual property is only applicable if the nature of the promise meets all of the following criteria:

1. The contract requires, or the customer reasonably expects that activities will be undertaken that significantly affect the intellectual property.
2. The rights granted directly expose the customer to any positive or negative effects of activities undertaken.
3. Those activities do not result in the transfer of a good or a service to the customer as those activities are undertaken.

If the right to access an intellectual property is granted, the entity shall account for the promise to grant a licence as a performance obligation satisfied over time because the customer will simultaneously receive and consume the benefit from the entity's performance of providing access to its intellectual property as access is granted. An example is a brand where different customers may obtain the benefit of the brand and the entity itself builds the name of the brand out (the activities that change the brand).

Factors that may indicate that a customer could reasonably expect that such activities will be undertaken include customary business practices, published policies or specific statements. IFRS 15 clarifies that the existence of a shared economic interest, such as a sales‐based royalty, may also indicate that the customer could reasonably expect that such activities will be undertaken. An entity's activities significantly affect the intellectual property to which the customer has rights when either:

1. Those activities are expected to significantly change the form or the functionality of the intellectual property; or
2. The ability of the customer to obtain benefit from the intellectual property is substantially derived from, or dependent upon, those activities, such as the entity maintaining the brand name.

If the above criteria are not met, the customer is regarded as obtaining the use of the intellectual property by default. Then it allows a customer access to the intellectual property when the licence was sold. As a result, the revenue would be recognised when the licence is sold to the customer. The point in time needs to be determined by considering from when the intellectual property can effectively be used.

Intellectual property that has significant stand‐alone functionality derives a substantial portion of its benefit from that functionality. Consequently, if the entity's activities do not significantly change the form or functionality of such intellectual property, then the entity's activities will not significantly affect the customer's ability to derive benefit from that intellectual property and would result in a right of usage of the intellectual property.

The following factors are specifically disregarded when making an assessment of right of access or right of usage:

1. Restrictions of time, geographical region or use: these are regarded as attributes of the promised licence.
2. Guarantees provided of a valid patent to intellectual property and that it will defend that patent from unauthorised use: a promise to defend is not regarded as a performance obligation since it protects the value of the patent.

Sales‐based or usage‐based royalties

The requirement for a sales‐based or usage‐based royalty applies when the royalty relates only to a licence of intellectual property or when a licence of intellectual property is the predominant item to which the royalty relates (thus significantly more value is given to the licence than to the other goods or services to which the royalty relates). Then, revenue from a sales‐based or usage‐based royalty shall be recognised at the latest of the following events:

1. The subsequent sale or usage occurs.
2. The performance obligation to which some or all of the sales‐based or usage‐based royalty has been allocated has been satisfied.

When the requirement above is not met, the requirements on variable consideration apply to the sales‐based or usage‐based royalty.

Repurchase agreements

A repurchase agreement is a contract in which an asset is sold, which is a promise or option to repurchase the asset. The repurchased asset may represent:

1. The original asset sold.
2. An asset that is substantially the same.
3. Another asset of which the asset that was originally sold is a component.

IFRS 15 identifies three forms of repurchase agreements:

1. An obligation to repurchase the asset (a forward).
2. A right to repurchase the asset (a call option).
3. An obligation to repurchase the asset at the customer's request (a put option).

A forward or a call option

In the case of a forward or a call option to repurchase an asset, control is not regarded to be transferred to the customer because of the limited ability of the customer to direct the use of and obtain substantially all of the remaining benefits from the asset. The contract is therefore treated as either:

1. A lease in accordance with IAS 17 (refer to Chapter 22) when the repurchase of the asset is for an amount that is less than the original selling price of the asset; or
2. A financing arrangement when the repurchase of the asset is for an amount that is equal to or more than the original selling price of the asset.

Time value is considered to compare the repurchase price with the selling price.

In the case of a financing arrangement, the asset is not derecognised, but a financial liability is recognised for the consideration received from the customer. The difference between the consideration received from the sale and the consideration to be paid for the repurchase is regarded as interest. When an option is not exercised the liability is derecognised and revenue is recognised.

A put option

In the case of a put option an obligation to repurchase the asset only arises when the customer requests the repurchase. The exercising of the right could result in the customer using the asset for just a time period. Two assessments need to be made by considering the time value of money:

1. If the repurchase price is lower, equal or higher than the original purchase price.
2. When the repurchase price is lower, whether the customer has a significant economic incentive to exercise that right. A significant economic incentive is assessed by considering various factors. These factors include:
   1. The relationship of the repurchase price to the expected market value of the asset at the date of the repurchase. A significant higher repurchase price indicates a significant economic incentive.
   2. The amount of time until the right expires.

Based on these assessments, four different accounting treatments are applicable:

1. When the repurchase price is lower than the original selling price and a significant economic incentive to exercise that right exists, the agreement is regarded as a lease in accordance with IAS 17.
2. When the repurchase price is lower than the original selling price and a significant economic incentive to exercise that right does not exist, the agreement is regarded as a sale of a product with a right of return.
3. When the repurchase price of the asset is equal to or greater than the original selling price and is more than the expected market value of the asset, the agreement is effectively a financing arrangement and accounted for as discussed under a forward or put option.
4. When the repurchase price of the asset is equal to or greater than the original selling price and is less than or equal to the expected market value of the asset, and the customer does not have a significant economic incentive to exercise its right, the agreement is also regarded as a sale of a product with a right of return.

Consignment arrangements

When a product is delivered to an intermediary, such as a dealer or a distributor, for sale to end customers, an assessment is made whether the intermediary obtains control of the product. If the intermediary does not obtain control of the product, the product delivered is held in a consignment arrangement. No revenue is recognised if the product is held as a consignment.

IFRS 15 identifies the following indicators of a consignment arrangement:

1. The product is still controlled by the entity until a specified event occurs, such as the sale of the product to a customer of the intermediary or until a specified period expires.
2. The entity is able to require the return of the product or transfer the product to a third party, such as another intermediary.
3. The intermediary does not have an unconditional obligation to pay for the product, although the payment of a deposit may be required.

Bill‐and‐hold arrangements

A bill‐and‐hold arrangement is a contract under which a customer is billed for a product, but the supplier retains physical possession of the product until it is transferred to the customer.

An assessment needs to be made whether the customer obtains control of that product before it is delivered by reviewing the terms of the agreement. Control would be obtained when the customer has the ability to direct the use of and obtain substantially all of the remaining benefits from the product even though it has decided not to exercise its right to take physical possession of that product. Then the supplier provides custodial services to the customer over the customer's asset.

For the customer to obtain control in a bill‐and‐hold arrangement, all of the following criteria must be met:

1. The reason for the bill‐and‐hold arrangement must be substantive, such as the customer requesting the arrangement;
2. The product must be identified separately as belonging to the customer;
3. The product must be ready for physical transfer to the customer; and
4. The supplier does not have the ability to use the product or to direct it to other customers.

When revenue is recognised for the sale of a product on a bill‐and‐hold basis, consideration should be made of other performance obligations to which a portion of the transaction price should be allocated.