(Continued)

Step 5 – Recognize revenue when PO is satisfied

[IFRS 15.31] said that an entity shall recognize revenue when the entity satisfies a PO by transferring good or service (ie. an asset) to a customer. An asset is transferred to customer when the customer obtains control of that asset.

Control includes the abilities to:

- Direct use of and obtain substantially all remaining benefit from assets; and

- Prevent others from directing the use of and obtaining benefit from such asset.

PO can be satisfied over time or at a point in time?

At the contract inception, an entity must determine whether PO is satisfied over time or at a point in time? If it could not satisfy conditions for over time recognition, the PO is then classified as satisfied at a point in time. [IFRS 15.32].

a. PO satisfied over time

A PO is satisfied over time if all of following conditions met:

(i) The customer simultaneously receives and consumes the benefits provided by the entity at the time the entity performs;

(ii) The customer controls the asset when the asset is created (performed) by the entity;

(iii) On customer’s perspectives, the asset usage should be pre-determined at the contract inception, no alternative use is expected.

Most importantly, the entity has enforceable rights to payment for performance completed to date.

The right to payment for performance completed to date does not need to be a fixed amount. However, at all the time throughout the duration of the contract, the entity must be entitled to an amount that at least compensates the entity performance completed to date if the contract is terminated by the customer or another party for reason other than the entity’s failure to perform as promised. [IFRS 15.37].

Revenue recognition

For each PO satisfies over time, the entity shall recognize revenue over time by measuring the progress toward complete satisfaction of that PO. The objective when measuring progress is to depict an entity’s performance in transferring control of goods or services promised to a customer (ie. the satisfaction of an entity’s performance obligation).

Method used to measure progress of each PO should be consistent throughout the contract; and between similar contracts, under similar circumstances.

At the end of each reporting period, the entity shall re-measure progress to complete satisfaction and recognize revenue accordingly. If progress (outcome) of the PO cannot be reliably measured, revenue could not be recognized. In some circumstance revenue can be recorded only to extent of incurred costs to date if outcome of performance is not reliably measured and the entity can contractually recover costs incurred to date in such circumstance.

b. PO satisfied at a point in time

If a PO does not satisfy conditions for an “over time” performance as said above, it is considered as “at a point in time” PO.

The time that PO is satisfied is when goods and services are transferred to customer and customer obtains control of the asset. Revenue is then recognized at the time of PO satisfaction.

Reference

- IFRS 15 Revenue from Contracts with Customers