What are the Indicators that control has passed ?

The indicators that control of a good or service has passed from an entity to a customer, according to IFRS 15, include:

  1. Right to Payment: The entity has a present right to payment for the asset. This implies that the customer is obligated to pay for the asset once control is transferred.
  2. Legal Title: The customer has obtained legal title to the asset. This usually occurs when the contract or applicable laws and regulations indicate a change of ownership.
  3. Physical Possession: The entity has transferred physical possession of the asset to the customer. This typically occurs through delivery of the asset to the customer's location or the customer taking possession at the entity's location.
  4. Risks and Rewards: The customer has the significant risks and rewards of ownership of the asset. This can involve risks related to damage, theft, or changes in market value.
  5. Customer Acceptance: The customer has accepted the asset. This may be specified in the contract or it might be implied by the customer's actions (for example, using the asset).

These indicators help in determining the point in time at which control of an asset is transferred from the entity to the customer, which is when an entity should recognize revenue for a performance obligation satisfied at a point in time.

Let's take an example of a computer manufacturer who sells a laptop to a customer online:

  1. Right to Payment: The customer pays for the laptop upfront via credit card when placing the order online. At this point, the computer manufacturer has a present right to payment for the laptop.
  2. Legal Title: Once the payment is confirmed, the legal title of the laptop passes to the customer as per the terms and conditions of the sale mentioned on the manufacturer's website.
  3. Physical Possession: The laptop is then packed and shipped to the customer. The moment the laptop is delivered and received by the customer, physical possession is considered transferred.
  4. Risks and Rewards: Upon receiving the laptop, the customer now bears the significant risks and rewards of ownership - for example, if the laptop is lost or damaged, it's the customer's responsibility.
  5. Customer Acceptance: The customer opens the package, turns on the laptop, and starts using it. This action can be seen as acceptance of the laptop.

All these indicators suggest that control of the laptop has passed from the computer manufacturer to the customer. Thus, at the point of delivery and acceptance, the manufacturer can recognize revenue from the sale of the laptop.


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