IFRS 15 Revenue from Contracts with Customers
3. Measuring Progress Towards Completion
3.1 Output Methods
*Output methods recognise revenue on the basis of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised.
*Examples of output methods include:
*Surveys of performance completed to date*
*Appraisals of results achieved
*Milestones achieved
*Time elapsed
*Units produced or delivered.
*The value of "work certified" to date may be a measure used to identify the degree of completion andtherefore revenue to be recognised in profit or loss. Work certified is an output method and a term that wasused under previous standards.
*Output methods should only be used when the output selected represents the entity's performance towards complete satisfaction of the performance obligation.*
*A disadvantage of output methods is that the outputs used may not be available or directly observable. When this is the case, an input method may be necessary.
3.2 Input Methods
*Input methods recognise revenue on the basis of the entity's efforts or inputs to the satisfaction of the performance obligation relative to the total expected inputs.*
*Examples of input methods include:
*Resources consumed
*Labour-hours worked
*Costs incurred
*Time elapsed
*Resources consumed.
*Revenue can be recognised on a straight -line basis if inputs are used evenly throughout the performance period.
3.3 Cost Recognition
*Costs associated with a contract whose performance obligation is satisfied over time are expensed as and when they are incurred; they are not recognised on a proportional basis.
*Therefore, if revenue is measured using an output method, prof it recognition will be volatile for contracts that straddle two or more accounting periods.*
*If an incurred cost is not proportionate to the progress in the satisfaction of the performance obligation that cost shall be excluded when measuring the progress of the contract.
*In this situation revenue will be recognised to the extent of the actual cost incurred in respect of that component.
4 Recognition of Contract Costs
4.1 Incremental Costs of Obtaining a Contract
Incremental costs of obtaining a contract— costs to obtain a contract that would not have been incurred if the contract had not been obtained.
*The incremental costs of obtaining a contract, such as sales commissions, are recognised as an asset if the entity expects to recover them.
*Costs to obtain the contract that would have been incurred regardless of whether the contract was obtained are charged to expense when incurred.
4.2 Costs to Fulfil a Contract
*Costs incurred to fulfil a contract that are not within the scope of another standard should be recognised as an asset if they meet all of the following criteria:
*They relate directly to a contract;
*They generate or enhance the resources of the entity; and
*They are expected to be recovered.
*Costs that must be expensed when incurred include:
*General and administrative costs;
*Cost of wasted materials, labour or other resources; and
*Costs that related to satisfied performance obligations.