QUESTION 35 Illustration 35–Applying practical expedient Company H

QUESTION 35 Illustration 35–Applying practical expedient Company H enters into a two-year contract to develop customized software for Company C. Company H concludes that the goods and services in this contract constitute a single performance obligation. Based on the terms of the contract, Company H determines that it transfers control over time, and recognizes revenue based on an input method best reflecting the transfer of control to Company C. Company C agrees to provide Company H monthly progress payments. Based on the expectation of the timing of costs to be incurred, Company H concludes that progress payments are being made such that the timing between the transfer of control and payment is never expected to exceed one year. Analyze whether there is any significant financing component in the contract or not.

Solution

Under IFRS 15, a significant financing component may exist in a contract if the timing of payments agreed upon by the parties provides either the customer or the vendor with a significant benefit of financing. The standard notes, however, that if the period between the transfer of promised goods or services to the customer and the payment by the customer is expected to be less than one year, the entity need not adjust the amount of the promised consideration for the effects of a significant financing component.

In the case of Company H and Company C, the contract is set up such that Company H transfers control of its work over time and recognizes revenue based on an input method. Company C makes monthly progress payments that coincide with the expectation of the timing of costs to be incurred by Company H.

As per the given situation, the time between when the control of the service is transferred and when the payment is made by Company C is never expected to exceed one year. Consequently, according to the practical expedient in IFRS 15, Company H does not need to adjust the promised consideration for the effects of a significant financing component. Therefore, in this particular scenario, there is no significant financing component in the contract.

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