Let’s take a look at some other recent examples of changes resulting from the implementation of IFRS 15.
This is from Teck Resources Limited:
This is a good illustration of one of the standard’s basic conceptual building blocks: let’s briefly summarize. An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service). The amount of revenue recognized is the amount allocated to the satisfied performance obligation. Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset (including the ability to prevent other entities from directing its use and obtaining the benefits from it).
A performance obligation may be satisfied at a point in time (typically for promises to transfer goods to a customer). An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time, if it meets one of the following criteria:
- (a) the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs – this might apply, for example, where the entity provides sub-contracting services to the customer as part of a larger project for which the customer is responsible;
- (b) the entity’s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced;
- (c) the entity’s performance doesn’t create an asset with an alternative use to the entity, and it has an enforceable right to payment for performance completed to date.
It appears that none of those apply in Teck’s circumstances. That is, the customer isn’t receiving and consuming the benefits of a coal shipment that hasn’t even been dispatched to it yet, and there isn’t any sense in which the customer controls the coal at the time that it’s being loaded into the shipment; also, if the shipment weren’t completed for whatever reason, Teck would presumably just sell the coal to someone else, with no enforceable right to bill the original intended recipient. At the same time, we can see how under the broader concepts of the old standard IAS 18, an application of percentage-of-completion accounting might have been considered appropriate here on the basis of the probability of receiving ultimate economic benefits, the ability to measure the transaction’s stage of completion reliably and so on (although by their nature, these criteria have more typically been applied to the rendering of services than to a transaction appearing to be essentially a sale of goods).
This next example is also from Teck:
As we’ve also discussed before, in some cases, it will be important for an entity to determine whether the nature of its promise is a performance obligation to provide goods or services that it controls itself (i.e. the entity is a principal) or rather to provide goods or services controlled by others (i.e. the entity is an agent). Of course, this distinction exists under current standards as well, but it’s more central to the structure of IFRS 15. The standard provides several indicators relevant to making the determination – some of these will be more relevant than others in any given situation. In the kind of situation Teck describes, indicators that could be relevant (of course I’m just using these as hypothetical illustrations – we don’t know the exact circumstances) include the degree of the entity’s responsibility for fulfilling the promise to provide the freight service, and the amount of discretion allowed to it in establishing the price. For example, an entity that carried out all freight services using its own ships would almost certainly be considered to be primarily responsible for fulfilling the promise; an entity that subcontracted the work to ships owned by others might not be. In the latter case though, the determination might still differ based on (say) the entity’s degree of latitude in selecting a shipping entity, in negotiating a price and other terms with that entity, and so on.
One more from the same company:
It’s a more industry-specific situation, but just for a high-level comment, the analysis under IFRS 15 depends heavily on identifying the transfer of control over an asset from one entity to another. Under IAS 18, the primary (although by no means only) emphasis was on assessing the transfer of the significant risks and rewards of ownership of the asset. Among other things, the IASB notes in the IFRS 15 basis for conclusions that the change should result in more consistent decisions “because it can be difficult for an entity to judge whether an appropriate level of the risks and rewards of ownership of a good or service has been transferred to the customer if the entity retains some risks and rewards…”
The opinions expressed are solely those of the author