IFRS 15 Over Time vs Point in Time: Criteria, Methods and Journals

An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (ie an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.

The bracketed "or as" is doing the heavy lifting. Everything else in this article is an elaboration of those two words.

Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset.

Control is not risk and reward, which is where IAS 18 sat, and it is not physical possession, which is only one indicator among five. Files that still reason in risk-and-reward language are applying IAS 18 and IAS 11, both superseded for annual periods beginning on or after 1 January 2018.

For each performance obligation identified in accordance with paragraphs 22–30, an entity shall determine at contract inception whether it satisfies the performance obligation over time or satisfies the performance obligation at a point in time. If an entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time.

Three consequences that get missed in practice.

The assessment is per performance obligation, not per contract. A contract to supply equipment, install it, and service it for three years can easily carry one point in time obligation and two over time obligations. Concluding "this is an over time contract" is already an error of framing.

The assessment is made at contract inception. Not at the reporting date, and not when the outcome becomes clear. You lock the pattern in when you sign. Paragraph 36 confirms the alternative use assessment is made at inception and not updated for later changes, but a contract modification accounted for under IFRS 15.18 to 21 can create a new assessment, and so can the loss of an enforceable right to payment on renewal.

Point in time is the residual. Paragraph 32 is written so that failing the over time test lands you at a point in time automatically. There is no third answer and no judgement call about which feels more faithful. If a working paper reaches over time by asserting it rather than by naming which of the three criteria in paragraph 35 is met, it has not done the test.

An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met:

(a) the customer simultaneously receives and consumes the benefits provided by the entity's performance as the entity performs;

(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; or

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

For some types of performance obligations, the assessment of whether a customer receives the benefits of an entity's performance as the entity performs and simultaneously consumes those benefits as they are received will be straightforward. Examples include routine or recurring services, such as a cleaning service, in which the receipt and simultaneous consumption by the customer of the benefits of the entity's performance can be readily identified.

Para B4. For other types of performance obligations, an entity may not be able to readily identify whether a customer simultaneously receives and consumes the benefits from the entity's performance as the entity performs. In those circumstances, a performance obligation is satisfied over time if an entity determines that another entity would not need to substantially re-perform the work that the entity has completed to date if that other entity were to fulfil the remaining performance obligation to the customer. In making that determination, the entity assumes two things: it disregards any contractual restriction or practical limitation that would otherwise stop it transferring the remaining obligation to another entity, and it presumes the replacement would not have the benefit of any asset that is presently controlled by the entity and that would remain controlled by the entity if the obligation were transferred.

The re-performance test in B4 is the practical tool here, and it is applied less often than it should be. The question is whether a replacement, taking over the remaining work, would have to redo what has already been done. If not, criterion (a) is met.

A cleaning contractor: no, last month's cleaning stays done, so criterion (a) is met. A bespoke software build stopped at 60 per cent looks similar at first glance, because a replacement developer inherits the code. But B4 tells you to disregard any asset that would remain under your control, and the part-built code is exactly such an asset. Strip it away and the replacement does start again, so criterion (a) fails and the analysis moves to (b) or (c). That instruction in B4 is the reason partially completed goods and work in progress do not quietly qualify under (a).

An asset created by an entity's performance does not have an alternative use to an entity if the entity is either restricted contractually from readily directing the asset for another use during the creation or enhancement of that asset or limited practically from readily directing the asset in its completed state for another use.

The restriction has to be substantive. A contractual clause that the customer would never enforce, or one that only bites at the moment of delivery, is not enough. Practical limitation means significant economic loss on redirection, through rework, redesign or selling at a material discount.

Note the timing difference buried in that sentence. The contractual restriction is assessed during creation, while the practical limitation is assessed on the asset in its completed state. A mass-produced item that a customer has merely reserved is not restricted; a machine built to a customer's specification that would need to be stripped and rebuilt to sell elsewhere is practically limited.

An entity shall consider the terms of the contract, as well as any laws that apply to the contract, when evaluating whether it has an enforceable right to payment for performance completed to date in accordance with paragraph 35(c). The right to payment for performance completed to date does not need to be for a fixed amount. However, at all times throughout the duration of the contract, the entity must be entitled to an amount that at least compensates the entity for performance completed to date if the contract is terminated by the customer or another party for reasons other than the entity's failure to perform as promised.

Four traps sit inside that paragraph.

"At all times throughout the duration." The right must hold at every point, not on average and not at most milestones. A contract that compensates you at each quarterly milestone but leaves you exposed between milestones fails, because there is a moment when the right does not exist.

"At least compensates." Cost recovery alone is not enough. IFRS 15.B9 explains what that means: an amount that approximates the selling price of the goods or services transferred to date, for example recovery of costs incurred plus a reasonable profit margin. A termination clause that reimburses costs incurred and nothing else falls short.

Any laws that apply to the contract. The right can come from statute or established legal precedent rather than from the contract. Equally, a contractual right that local law would not enforce is not a right. Both directions require you to look outside the contract.

Termination for convenience. The reference to termination for reasons other than the entity's failure to perform is aimed squarely at the customer walking away because it feels like it. A deposit that is forfeited, or liquidated damages set at a fixed sum, will usually fall short of compensating for performance to date at some point in the contract.

If a performance obligation is not satisfied over time in accordance with paragraphs 35–37, an entity satisfies the performance obligation at a point in time. To determine the point in time at which a customer obtains control of a promised asset and the entity satisfies a performance obligation, an entity shall consider the requirements for control in paragraphs 31–34. In addition, an entity shall consider indicators of the transfer of control, which include, but are not limited to, the following:

(a) the entity has a present right to payment for the asset;

(b) the customer has legal title to the asset;

(c) the entity has transferred physical possession of the asset;

(d) the customer has the significant risks and rewards of ownership of the asset;

(e) the customer has accepted the asset.

Two words carry the weight: "include, but are not limited to". This is a non-exhaustive list of evidence, not a checklist and not a scoring exercise. A file that records "four of five indicators met, therefore control has transferred" has substituted arithmetic for judgement.

Note also that risks and rewards appears here, at (d), as one indicator of control. It survived into IFRS 15 in that reduced role. It is not the test.

For each performance obligation satisfied over time, an entity shall recognise revenue over time by measuring the progress towards complete satisfaction of that performance obligation. The objective when measuring progress is to depict an entity's performance in transferring control of goods or services promised to a customer.

"Depict performance in transferring control" is the test any method has to pass. It is not "match costs to revenue" and it is not "produce a smooth margin". Where those two objectives conflict, paragraph 39 wins.

An entity shall apply a single method of measuring progress for each performance obligation satisfied over time and the entity shall apply that method consistently to similar performance obligations and in similar circumstances. At the end of each reporting period, an entity shall remeasure its progress towards complete satisfaction of a performance obligation satisfied over time.

Para 41. Appropriate methods of measuring progress include output methods and input methods.

Two obligations here that are routinely missed. A single method per obligation, so you cannot blend cost-to-cost with milestones on the same obligation because one gives a more comfortable result. And remeasurement every reporting date, which makes progress an estimate revisited continuously, accounted for prospectively as a change in estimate under IAS 8.

Output methods recognise revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract. Output methods include methods such as surveys of performance completed to date, appraisals of results achieved, milestones reached, time elapsed and units produced or units delivered.

Conceptually these are the better methods, because they measure the thing the standard cares about. The catch is in B15's own warning: they only work where the output you can observe faithfully represents your progress, and the information is often not available without undue cost.

Units delivered and units produced carry a specific trap. Where there is work in progress or finished goods controlled by the customer that the output measure does not capture, those methods ignore performance you have genuinely completed, and B15 says they would not faithfully depict it. Physical location on site is not the test; control is.

As a practical expedient, if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity's performance completed to date (for example, a service contract in which an entity bills a fixed amount for each hour of service provided), the entity may recognise revenue in the amount to which the entity has a right to invoice.

Underused, and a genuine simplification for time-and-materials and per-transaction contracts. The condition is that the invoiced amount corresponds directly with value delivered. A contract with a fixed monthly fee, an upfront mobilisation charge, tiered pricing or a back-end bonus does not qualify, because the invoicing pattern and the delivery pattern have come apart.

Input methods recognise revenue on the basis of the entity's efforts or inputs to the satisfaction of a performance obligation relative to the total expected inputs to the satisfaction of that performance obligation. Input methods include methods such as resources consumed, labour hours expended, costs incurred, time elapsed or machine hours used. A shortcoming of input methods is that there may not be a direct relationship between an entity's inputs and the transfer of control of goods or services to a customer.

The standard names its own weakness. Cost-to-cost assumes spending is a proxy for progress, and that assumption breaks whenever cost is incurred without performance being transferred.

A shortcoming of input methods is that there may not be a direct relationship between an entity's inputs and the transfer of control of goods or services to a customer. Therefore, an entity shall exclude from an input method the effects of any inputs that, in accordance with the objective of measuring progress in paragraph 39, do not depict the entity's performance in transferring control of goods or services to the customer. For instance, when using a cost-based input method, an adjustment to the measure of progress may be required in the following circumstances:

(a) when a cost incurred does not contribute to an entity's progress in satisfying the performance obligation. For example, an entity would not recognise revenue on the basis of costs incurred that are attributable to significant inefficiencies in the entity's performance that were not reflected in the price of the contract, such as the costs of unexpected amounts of wasted materials, labour or other resources.

(b) when a cost incurred is not proportionate to the entity's progress in satisfying the performance obligation. In those circumstances, the best depiction of the entity's performance may be to adjust the input method to recognise revenue only to the extent of that cost incurred. That is a zero-margin outcome, and B19(b) applies it only where the good is not distinct, the customer obtains control of it significantly before receiving the related services, its cost is significant relative to the total expected costs, and the entity procures it from a third party and is not significantly involved in designing and manufacturing it.

Limb (a), wasted cost, is the one auditors chase and preparers resist, because excluding it turns an overrun into an immediate margin hit rather than a revenue catch-up. Limb (b), uninstalled materials, is the one everybody forgets. Deliver a GBP 4m third-party turbine to site on day one of a GBP 20m contract and a naive cost-to-cost calculation says you are 20 per cent done and books a fifth of the contract margin. Where the four conditions above hold, B19(b) says recognise revenue equal to the cost of that turbine and no margin, because procuring is not installing. Note the last condition: plant you designed and built yourself does not get this treatment, because manufacturing it was performance.

An entity shall recognise revenue for a performance obligation satisfied over time only if the entity can reasonably measure its progress towards complete satisfaction of the performance obligation. An entity would not be able to reasonably measure its progress towards complete satisfaction of a performance obligation if it lacks reliable information that would be required to apply an appropriate method of measuring progress.

Para 45. In some circumstances (for example, in the early stages of a contract), an entity may not be able to reasonably measure the outcome of a performance obligation, but the entity expects to recover the costs incurred in satisfying the performance obligation. In those circumstances, the entity shall recognise revenue only to the extent of the costs incurred until such time that it can reasonably measure the outcome of the performance obligation.

The IAS 11 muscle memory here is to stop recognising revenue altogether. That is not what paragraph 45 says. Revenue equals cost, margin is nil, and the contract keeps moving.

Paragraph 119 requires disclosure of information about the entity's performance obligations, including when the entity typically satisfies them, and paragraph 124 requires an entity to disclose the methods used to recognise revenue for performance obligations satisfied over time and an explanation of why the methods used faithfully depict the transfer of goods or services.

The second half of paragraph 124 is the part most policies omit. Stating that the group uses an input method based on costs incurred satisfies the first requirement. Explaining why that depicts transfer of control satisfies the second, and a boilerplate policy note that names the method without the explanation is technically incomplete.