(Continued)

Step 2: Identify Performance Obligation (PO) for contract under IFRS 15

At contract inception, the Company shall assess goods or services promised in a contract with customer and shall identify each promise as a separate PO if either:

(i) A good or service (or a bundle of goods/services) that is distinct; or

(ii) A series of distinct goods or services that are substantially the same and have pattern of transfer to customer

Please be noted that, a promise can be legally enforceable or implied by customary business practice, published policies or specific statements if at the time of entering into the contract, those promises create a valid expectation of the customer that the entity will transfer a good or service to customer.

How is same in pattern of transfer?

[Par. IFRS 15.23] said that, a series of distinct goods or services has same pattern of transfer to

customer if both of the following are met:

- Each distinct good or service in the series is PO satisfied over time;

- A same method is used to evaluate the entity’s progress toward PO satisfaction for each distinct good or service in the series.

Critical nature of PO

An activity that does not result in transfer of good or service to client, it cannot be identified as a separate PO. In such case it should be combined with other distinct good and service of the contract to form a PO.

For example, a service provider may need to perform various administrative works to set up a contract. Performance of those tasks does not transfer a service to customer as the tasked performed. Therefore those setup activities are not PO.

[Par. IFRS 15.25]

Criteria for distinction of good or service

A good or service that is promised to transfer to customer is distinct if both of following criteria are met:

(i) The customer can benefit from the good or service either on its own or together with other resources that are readily available to customer; and (-> buyer’s aspect)

(ii) The entity’s promise to transfer good or service to customer is separately identifiable from other promises in the contract (-> seller’s aspect)

[Par. IFRS 15.29] shares some indicators to show that good and service is separate from other goods/service in the contract such as:

o The entity does not promise to provide significant service of integrating the good and service with other goods/services in the contract to form a bundle.

o Good or service does not modify or customize other goods/services in the contract significantly.

o Goods and services are not interdependent or interrelated.

However, those indicators are examples only. It is not only limited to those. Judgment should be made in this case to evaluate whether promise in the contract is distinct from others.

Therefore to be able to be distinct, good and service must be separable in both buyers and seller’s aspects.

Examples of distinct PO

An IT company sells an ERP solution to customer at price of USD 5,000. Which comprises of:

- Initial ERP setup and customization

- 01-year maintenance service

In this example, there are 02 POs which present for 02 distinct promises to be delivered by the IT company. In details:

- The customer can benefit ERP functions properly without maintenance. Maintenance is a supplementary component only.

- The seller (IT company) can provide ERP with or without maintenance service. Maintenance service can also be done by the seller itself or it can be done by another servicing company. Therefore ERP installation and customization is highly independent with maintenance service that the seller can provide it separately.

=> Therefore the contract comprises of 02 separately identifiable promises to transfer goods and services. It means 02 POs existed.

Revenue then is recognized for each PO when it is satisfied of completion.

(To be continued)

Reference

- IFRS 15 Revenue from Contracts with Customers