Step 5 Recognise revenue when performance obligation is satisfied
9.1 Step 5 is to determine the appropriate method of revenue recognition when (or as) the entity satisfies performance obligations at a point in time or over time.
9.2 An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer. A good or service is transferred when (or as) the customer obtains control of that good or service.
9.3 When (or as) a performance obligation is satisfied, an entity recognises as revenue the amount of the transaction price that is allocated to that performance obligation, this could occur over time or at a point in time.
9.4 A performance obligation is satisfied at a point in time when the entity satisfies the performance obligation (i.e. when the customer obtains control over the asset).
9.5 A performance obligation is satisfied over time by measuring the progress towards complete satisfaction of that performance obligation. An entity transfers control of a good or service over time when one of the following criteria is met:
– the customer simultaneously receives and consumes the benefits provided by the entity’s performance
– the entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced
– the entity’s performance does not create an asset with an alternative use to the entity, or
– the entity has an enforceable right to payment for performance completed to date.
9.6 If the entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time.
9.7 Transfer of control
(a) Revenue is recognised in accordance with the pattern of transfer.
(b) Revenue that is allocated to performance obligations satisfied at a point in time will be recognised when a customer obtains control of a promised asset. Indictors that a customer obtains control of a promised asset includes:
(i) An entity has a present right to payment for the asset
(ii) The customer has legal title to the asset
(iii) The entity has transferred physical possession of the asset
(iv) The customer has the risks and rewards of ownership of the asset
(v) The customer has accepted the asset.
(c) If the performance obligation is satisfied over time, the revenue allocated to that performance obligation will be recognised over the period the performance obligation is satisfied.
(d) Entities will need to adopt (and disclose) the method that best depicts the pattern of the transfer of control over time.
(e) Additional application guidance is provided to address when entities need to determine whether a licence of intellectual property transfers to a customer over time or at a point in time.
9.8 Contract costs and other application guidance
(a) The standard also specifies how to account for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. Provided those costs are expected to be recovered, they can be capitalised and subsequently amortised.
(b) Detailed application guidance is provided to assist entities in applying these requirements to common arrangements, including: licences; warranties; rights of return; principal-versus-agent considerations; options for additional goods or services and breakage.
9.9 Disclosure
(a) An entity is to disclose sufficient information to enable users of the financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
(b) An entity should disclose both the qualitative and quantitative information about all of the following:
(i) its contracts with customers;
(ii) the significant judgments, changes in the judgments, made in applying the guidance to those contracts; and
(iii) any assets recognised from the costs to obtain or fulfil a contract with a customer.
(c) An entity needs to consider the level of detail necessary to satisfy disclosure objective and how much emphasis to place on each of the requirements. An entity should aggregate or disaggregate disclosures to ensure that useful information is not obscured.
(d) To achieve the disclosure objective, the standard introduces additional disclosure requirements, including:
(i) significant judgements made
(ii) disaggregation of revenue
(iii) information about contract balances
(iv) how an entity satisfies its performance obligations
(v) information about remaining performance obligations
(vi) significant payment terms
(vii) nature of the goods or services
(viii) obligations for returns, refunds
(ix) warranties and related obligations, etc.
Last review: 31 December 2017