Transfer control of goods or services

[Yakub02]

A company transfers control of a good or service over time (therefore, satisfying a performance obligation and recognising revenue over time),

if one of the following criteria is met:  the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs;

 the company’s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced; or

 the company’s performance does not create an asset with an alternative use (to the seller) and the entity has an enforceable right to payment for performance completed to date.

If a performance obligation is satisfied over time an entity needs a mechanism to identify the extent to which the performance obligation has been met.

Performance obligations satisfied at a point in time? If a performance obligation is not satisfied over time then it is satisfied at a point in time.

Measuring progress towards complete satisfaction of a performance obligation For a performance obligation satisfied over time, revenue is recognised by measuring the progress towards complete satisfaction of that performance obligation

 A single method of measuring progress should be used for each performance obligation and that method should be applied consistently to similar performance obligations and in similar circumstances.

 Progress must be remeasured at the end of each reporting period. Possible methods of measuring progress include both output methods and input methods

 

[Yakub02]

Regardless of the above, revenue for a sales-based or usage-based royalties promised in exchange for a licence of intellectual property is recognised only when (or as) the later of the following events occurs:

 the subsequent sale or usage occurs; and  the performance obligation to which some or all of the sales-based or usage-based royalty has been allocated has been satisfied (or partially satisfied).

The agreed timing of payments in a contract might have the effect of the contract containing a significant financing component.

This could occur due to explicit or implied terms in the contract.

In such cases, the transaction price must be adjusted for the effects of the time value of money with the objective of recognising revenue at an amount that reflects the cash price that a customer would have paid for the goods or services.

 

[Yakub02]

No adjustment is necessary if the period between the transfer of, and payment for, the promised good or service is expected to be one year or less

The discount rate used should be one that would be reflected in a separate financing transaction between the entity and its customer at contract inception.

The rate would reflect both credit characteristics and collateral or security provided by the parties. It might be possible to identify the rate as that rate which discounts the nominal amount of the promised consideration to the price that the customer would pay in cash for the goods or services when (or as) they transfer to the customer.