A software house signs one contract to supply a licence and to tailor it to a customer’s warehouse. The customer pays the whole price on day one. When does that money become revenue? On signing, as the work happens, on delivery or partly each way? This is the step five question in IFRS 15, and it trips up students and preparers alike.
Why timing is the real question
IFRS 15 does not let an entity pick a recognition pattern because it feels sensible. Each performance obligation is tested on its own. Revenue is recognised over time only if the obligation meets one of a short list of criteria. Fail every one and the obligation is treated as satisfied at a single point in time, and the entity then has to work out when control actually passes to the customer.
Two obligations in the same contract need not land on the same side of that line. Getting it wrong moves revenue between periods and misstates the contract balance, which is what examiners look for.
Criteria versus indicators
A common exam slip is to blur the two tests. The over time route uses criteria, and any one is enough. The point in time route uses indicators of control, such as legal title, physical possession and customer acceptance, weighed together to fix a date.
Measuring what has been done
Where an obligation is satisfied over time, the entity still has to measure progress towards completion with a method that faithfully depicts the transfer of control. The lesson asks which kind of method suits the facts given and what would make a method unreliable.
What the lesson works through
- testing each obligation against the over time criteria
- deciding, for each obligation, what follows from that test: measuring progress or dating the transfer of control
- the revenue, the contract liability and the journals for the period
- what the example leaves out
Test the facts yourself
The worked contract and its figures stay inside the lesson. Work through the Amatle Institute lesson on over time and point in time recognition and decide each obligation before you see the answer.
Questions about this topic
When is revenue recognised over time under IFRS 15?
Only when an obligation meets at least one of three criteria: the customer gets and uses up the benefit as the work is done, the work creates or improves an asset the customer controls while it is being built, or the work creates an asset with no other use to the entity and the entity has an enforceable right to be paid for work completed so far. Where no criterion is met, revenue is recognised at the point control passes.
How is the point in time of transfer identified?
The entity weighs indicators that control has passed, such as a present right to payment, legal title, physical possession, the significant risks and rewards of ownership and customer acceptance. No single indicator decides it.
How is progress measured for an obligation satisfied over time?
With one method per obligation that faithfully depicts the transfer of control, either an output method or an input method, applied consistently to similar obligations and leaving out anything that does not reflect the entity's performance, such as wasted costs.
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