Revenue & Leases (IFRS 15 & 16)

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IFRS 15 paragraph 9(e) requires, as one of five conditions for an arrangement to qualify as a contract, that it is probable the entity will collect the consideration it is entitled to in exchange for the goods or services transferred, considering only the customer's ability and intention to pay. IFRS defines 'probable' as more likely than not, a threshold just above 50%, so the assessment does not require near-certainty. The option describing a near-certainty standard sets the bar far higher than the standard requires. The option requiring a signed guarantee or credit insurance describes one possible way to support a collectability conclusion, but that evidence is not itself the threshold the standard defines — collectability can equally be supported by other evidence such as the customer's payment history or the entity's customary business practices. The option describing a much higher, roughly 75-80% style threshold describes how a similarly worded criterion is applied under a different accounting framework, not how IFRS 15 defines the same word.

Source: IFRS 15 Revenue from Contracts with Customers, paragraph 9(e) (collectability criterion for contract identification)

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IFRS 15 paragraph 17 requires an entity to combine two or more contracts entered into at or near the same time with the same customer, and account for them as a single contract, if any one of three conditions is met: the contracts were negotiated as a package with a single commercial objective; the consideration in one contract depends on the price or performance of the other; or the goods or services promised form a single performance obligation. Here two of those conditions are present, so combination is required. The option requiring different customers has the rule backwards — combination applies specifically to contracts with the same customer (or related parties of that customer), not different ones. The option tying combination to invoicing practice is wrong because how the entity chooses to invoice is an administrative matter that plays no role in the paragraph 17 test. The option tying combination to the number of physically signed documents is wrong because IFRS 15 looks to the substance of how the arrangements were negotiated and priced, not to their legal or physical form.

Source: IFRS 15 Revenue from Contracts with Customers, paragraph 17 (combination of contracts)

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IFRS 15 paragraph B58 sets out cumulative conditions under which a licence of intellectual property provides a right to access (recognized over time) rather than a right to use (recognized at a point in time): the contract requires, or the customer reasonably expects, that the entity will undertake activities that significantly affect the intellectual property to which the customer has rights; those activities expose the customer to positive or negative effects as they occur; and the activities do not themselves transfer a separate good or service. The scenario describes exactly this — ongoing signature updates that change the protection the customer receives — so revenue is recognized over the licence term. The option recognizing revenue on delivery of the license key ignores the B58 test entirely; delivery-triggered, point-in-time recognition is appropriate for a right-to-use licence that lacks these features, not automatically for every licence. The option tying the answer to contract duration is wrong because the over-time-versus-point-in-time distinction depends on the substance of the B58 criteria, not on how long the contract happens to run — a two-year right-to-use licence for static software with no required updates would still be recognized at a point in time. The option citing customer usage as the trigger invents a recognition basis IFRS 15 does not apply to licences; the standard's distinction turns on the access-versus-use test, not on when the customer happens to start using the software.

Source: IFRS 15 Revenue from Contracts with Customers, paragraph B58 (licences providing a right to access intellectual property)

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IFRS 15 paragraphs 66-67 require non-cash consideration to be included in the transaction price and measured at fair value. If the entity cannot reasonably estimate the fair value of the non-cash consideration, it instead measures the consideration indirectly by reference to the standalone selling price of the goods or services promised to the customer. The option using par or nominal share value is wrong because a certificate's stated par value is an arbitrary legal figure disconnected from fair value and is not a measurement basis IFRS 15 recognizes. The option excluding non-cash consideration from the transaction price entirely is wrong because IFRS 15 explicitly requires such consideration to be included in the transaction price at the time control of the related goods or services transfers, not deferred until a later cash sale. The option using the customer's own historical cost of issuing the shares is wrong because that amount reflects the customer's cost basis, not the fair value (or standalone-selling-price proxy) of what the supplier actually received in exchange for its services.

Source: IFRS 15 Revenue from Contracts with Customers, paragraphs 66-67 (non-cash consideration)

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IFRS 15 paragraphs 105-108 distinguish a contract asset — an entity's right to consideration in exchange for goods or services already transferred, when that right is conditional on something other than the passage of time — from an unconditional right to consideration, which is a receivable, and from a contract liability — an entity's obligation to transfer goods or services to a customer for which the entity has already received (or is due) consideration. The unbilled amount here depends on passing an inspection, a condition other than time, so it is a contract asset; the advance payment creates an obligation to perform, so it is a contract liability. The option calling both amounts receivables is wrong because a receivable requires an unconditional right to payment, which the milestone-dependent amount does not have. The option that swaps the two classifications is wrong on both counts: it mislabels the inspection-conditional amount as an obligation and the prepayment as an asset, the reverse of paragraphs 105-108. The option requiring immediate revenue recognition on both amounts is wrong because recognizing revenue depends on satisfying performance obligations under the contract's five-step model, not merely on cash receipt or the existence of a milestone.

Source: IFRS 15 Revenue from Contracts with Customers, paragraphs 105, 107-108 (contract assets, receivables and contract liabilities)

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IFRS 15 paragraphs B20-B22 require a seller with a right-of-return obligation to recognize revenue only for the consideration it expects to be entitled to after excluding expected returns (treating the return right as a form of variable consideration subject to the constraint), to recognize a refund liability for the amount it expects to refund, and to recognize an asset (with a corresponding adjustment to cost of sales) representing its right to recover the products expected to be returned. The option recognizing the full sales price with no return adjustment is wrong because a right of return is not a separate service obligation under IFRS 15 — it directly affects how much transaction price the entity is entitled to keep. The option deferring all revenue until the window closes is far more conservative than the standard requires; IFRS 15 permits recognizing revenue immediately once expected returns can be reasonably estimated, which the retailer's extensive historical data supports. The option that nets the return rate into revenue but omits a refund liability is wrong because the model requires the refund obligation and the asset for recovered products to be recognized separately from the net revenue figure, not folded away once an estimate is applied.

Source: IFRS 15 Revenue from Contracts with Customers, paragraphs B20-B22 (rights of return)

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IFRS 16 paragraphs 9-11 define a lease as a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration, which requires an identified asset (here the specific truck, with no supplier substitution right) and control resting with the customer, evidenced by the customer directing how and for what purpose the asset is used and obtaining substantially all of the economic benefits from that use. All of these features are present, so the arrangement is a lease. The option focused on legal title is wrong because IFRS 16's test turns on control of use, not on who holds legal title — a lessor commonly retains title throughout a lease term. The option requiring the word 'lease' or 'rental' in the contract's title is wrong because IFRS 16 looks to the substance of the arrangement rather than its label. The option citing a real-estate-and-equipment-only scope with a materiality threshold is wrong because the core lease definition applies broadly to identified assets of any type; IFRS 16 does provide separate, narrower recognition exemptions for short-term leases and low-value assets, but those are optional practical expedients, not a blanket restriction on which asset types or contracts can meet the definition of a lease in the first place.

Source: IFRS 16 Leases, paragraphs 9-11 (definition of a lease)

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IFRS 16 paragraphs 5-8 provide two independent, optional recognition exemptions for lessees: short-term leases (a lease term of 12 months or less at commencement, with no purchase option) and leases of low-value assets. The low-value asset exemption is assessed on an absolute basis by reference to the value of the underlying asset when new, regardless of the lease term or the size of the lessee; the IASB's basis for conclusions describes the Board having in mind assets of around USD 5,000 or less when new, citing examples such as small IT equipment, tablets, personal computers and small items of office furniture. Because these are two separate exemptions, the computers can qualify under the low-value test on their own, and the building lease can independently qualify under the short-term test. The option requiring both conditions to hold at once is wrong because it treats two independent exemptions as if they were a single combined test. The option restricting the low-value exemption to intangible assets is wrong because the Board's own examples are physical items such as computers and furniture. The option claiming IFRS 16 abolished all lessee exemptions is wrong because these two practical expedients were retained specifically to reduce the burden of capitalizing immaterial or short-lived leases.

Source: IFRS 16 Leases, paragraphs 5-8 (recognition exemptions) and Basis for Conclusions paragraph BC100 (low-value assets)

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IFRS 16 paragraph 22 requires a lessee to apply a single accounting model, recognizing a right-of-use asset and a lease liability for substantially all of its leases, subject only to the short-term and low-value recognition exemptions; the old finance-versus-operating distinction was removed for lessees. IFRS 16 paragraphs 61-66, however, retain the previous dual classification approach for lessors, who must still classify each lease as a finance lease or an operating lease based on the extent to which the lease transfers the risks and rewards incidental to ownership of the underlying asset. So the lessor's model was left substantively unchanged even though the lessee's model changed fundamentally. The option claiming both parties now apply the identical single model is wrong because only lessees were moved to the single on-balance-sheet model; lessors kept the dual classification test. The option that swaps the two roles is wrong because it describes lessees as still using risk-and-reward classification and lessors as using the single right-of-use model, the reverse of what IFRS 16 actually requires. The option claiming neither party recognizes anything at commencement is wrong because lessees recognize a right-of-use asset and lease liability up front, and lessors recognize either a net investment in the lease (finance lease) or continue reporting the underlying asset (operating lease).

Source: IFRS 16 Leases, paragraph 22 (single lessee model) and paragraphs 61-66 (lessor classification)

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IFRS 16 paragraph 26 requires a lessee to discount lease payments using the interest rate implicit in the lease if that rate can be readily determined; if it cannot, the lessee uses its incremental borrowing rate instead. The option specifying weighted-average cost of capital is wrong because IFRS 16 does not reference a general corporate cost-of-capital figure at all — it specifies only the two rates above. The option specifying a risk-free government bond rate is wrong because the incremental borrowing rate is explicitly not risk-free: it is defined as the rate the lessee would have to pay to borrow, over a similar term and with similar security, the funds necessary to obtain an asset of similar value, so it reflects the lessee's own credit standing and the transaction's specific terms. The option allowing the lessee to pick whichever rate minimizes the liability is wrong because IFRS 16 does not grant that discretion; using an artificially low rate to shrink the reported liability would undermine faithful representation, which the standard's hierarchy of rates is specifically designed to prevent.

Source: IFRS 16 Leases, paragraph 26 and Appendix A (definition of the lessee's incremental borrowing rate)

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IFRS 16 paragraphs 27(b) and 42(b) require variable lease payments that depend on an index or a rate to be included in the initial measurement of lease payments using the index or rate at commencement, and then remeasured when there is a change in the future lease payments resulting from a change in that index or rate (typically when the adjustment to the cash payments takes effect). This remeasurement uses the discount rate applied at commencement, left unchanged, because a change in an index or rate is not a lease modification, and the offsetting entry adjusts the right-of-use asset rather than profit or loss. The option expensing the extra rent as incurred with no balance-sheet adjustment is wrong because index-linked variable payments are explicitly brought into the lease liability, unlike payments that are truly variable with no index or rate basis (for example, payments based purely on sales or usage), which are expensed as incurred and never enter the liability. The option treating the change as a lease modification requiring a revised discount rate is wrong because IFRS 16 distinguishes remeasurement triggered by an index or rate change (unchanged discount rate) from an actual lease modification, such as a change in the scope or consideration of the lease that was not part of its original terms (which can require a revised discount rate). The option ignoring the change entirely because it is 'fully variable' conflates index/rate-linked payments, which are on-balance-sheet and subject to remeasurement, with genuinely usage- or sales-based variable payments, which are the ones IFRS 16 keeps off the lease liability.

Source: IFRS 16 Leases, paragraphs 27(b) and 42(b) (variable lease payments that depend on an index or a rate)

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IFRS 16 paragraphs 99-103 require an entity to first apply IFRS 15's requirements to determine whether the transfer of an asset in a sale-and-leaseback transaction is a sale. When it is not — as here, because the repurchase option indicates the bank has not obtained control of the warehouse — the seller-lessee continues to recognize the transferred asset and instead recognizes a financial liability equal to the proceeds received, accounted for applying IFRS 9; the buyer-lessor recognizes a financial asset for the same amount rather than the underlying property. The option describing derecognition and a right-of-use asset is wrong because that treatment applies only when the transfer does qualify as a sale under IFRS 15, which is not the case in this scenario. The option requiring immediate recognition of the full gain or loss is wrong because that outcome is not a general rule for every sale-and-leaseback transaction — even when a transfer does qualify as a sale, gain or loss is limited to the portion of the asset's rights transferred to the buyer-lessor rather than recognized in full, and here no sale has occurred at all, so no such gain or loss arises. The option placing the transaction outside IFRS 16's scope is wrong because sale-and-leaseback transactions, including those that fail the IFRS 15 sale test, are explicitly addressed within IFRS 16 itself rather than being left to IAS 16's revaluation model.

Source: IFRS 16 Leases, paragraphs 99-103 (sale and leaseback transactions)

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IFRS 15 paragraph 79 restricts the residual approach to situations where a good or service's standalone selling price is highly variable — sold to different customers, at or near the same time, for a broad range of amounts from which no representative price is discernible — or uncertain, meaning the entity has not yet established a price for the good and has never sold it on a standalone basis, exactly the circumstances described. The option treating the residual approach as available whenever it is merely more convenient is wrong because paragraph 79 sets out specific eligibility criteria rather than leaving the choice of method to administrative preference. The option restricting the approach to goods that are never sold standalone under any circumstance is wrong because the uncertain-price criterion only requires that the good has not yet been sold standalone as of the current estimate, not that standalone sales be permanently impossible in the future. The option conditioning use of the approach on a customer's request is wrong because IFRS 15 makes the residual approach a matter of the entity's own accounting policy judgment against the standard's criteria, not something triggered by customer preference.

Source: IFRS 15 Revenue from Contracts with Customers, paragraph 79 (estimating standalone selling price)

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Under IFRS 15 paragraph 35, revenue is recognized over time if any one of three criteria is met, and the enforceable-right-to-payment criterion is satisfied here: the software has no alternative use to the company because it is built specifically for this client, and the company can require payment for work performed to date if the client cancels for reasons unrelated to the company's own non-performance. The option requiring the simultaneous-receipt-and-consumption criterion to be met is wrong because paragraph 35's three criteria are alternatives — satisfying any single one is sufficient, so the absence of that particular criterion does not prevent over-time recognition here. The option treating custom software as automatically a good recognized only on delivery is wrong because IFRS 15 does not classify promises as goods or services for recognition-timing purposes based on their physical or digital nature; the paragraph 35 criteria apply regardless of that distinction. The option treating the mere existence of a contract and an expectation of payment as sufficient is wrong because revenue recognition under IFRS 15 depends on the transfer of control assessed against paragraph 35's specific criteria, not on the existence of a contract alone.

Source: IFRS 15 Revenue from Contracts with Customers, paragraph 35 (performance obligations satisfied over time)

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IFRS 15 paragraph B35 identifies control of the specified good or service before it is transferred to the customer as the determining factor for principal status; the marketplace never takes title, cannot redirect the products to anyone but the ordering customer, and bears no inventory risk, so it does not control the products before transfer and is an agent, recognizing only its commission. The option treating processing payments and controlling the customer relationship as making the marketplace a principal is wrong because those facts are not, by themselves, indicators of control over the specified good under paragraph B35; a party can process payment and own the customer relationship while still acting as an agent. The option allowing an agent to nonetheless recognize gross revenue is wrong because IFRS 15 requires an agent to recognize revenue in the amount of the fee or commission it retains, not the gross transaction price. The option elevating credit risk to the sole determinative indicator is wrong because IFRS 15's control assessment weighs multiple indicators together, including who is responsible for fulfilling the promise and who has discretion over pricing, rather than resting on credit risk alone.

Source: IFRS 15 Revenue from Contracts with Customers, paragraphs B34-B36 (principal versus agent considerations)

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IFRS 15 paragraphs B28-B33 distinguish an assurance-type warranty, which merely promises that a product meets agreed specifications and is accounted for under IAS 37, from a service-type warranty, which provides the customer with a service beyond fixing defects existing at the time of sale and is accounted for as a separate performance obligation under IFRS 15; the first warranty here only confirms specification compliance, while the second, purchased separately and covering maintenance and accidental damage regardless of any manufacturing defect, clearly provides an additional service. The option classifying both as assurance-type is wrong because being offered alongside the same product does not, by itself, determine warranty type; the substance of what each warranty promises is what matters. The option classifying both as service-type merely because one is priced separately is wrong because separate pricing is only one indicator, and it does not apply to the first warranty here, which is bundled into the base sale and promises nothing beyond defect-free performance. The option swapping the two classifications is wrong because it inverts the substance of each warranty: the bundled, defects-only promise is the assurance-type warranty, and the separately purchased, broader-coverage promise is the service-type warranty.

Source: IFRS 15 Revenue from Contracts with Customers, paragraphs B28-B33 (warranties)

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IFRS 15 paragraphs 91-94 require an entity to capitalize the incremental costs of obtaining a contract, costs it would not have incurred if the contract had not been obtained, such as a success-based sales commission, and amortize them on a systematic basis consistent with the transfer of the related goods or services, unless paragraph 94's practical expedient applies, which permits immediate expensing only when the resulting asset's amortization period would be twelve months or less; here the contracts are fulfilled over eighteen months, so the expedient is unavailable and capitalization is required. The option applying the practical expedient regardless of contract duration is wrong because paragraph 94 conditions the expedient specifically on a one-year-or-less amortization period, not merely on the cost being linked to an identifiable contract. The option amortizing over the sales staff's employment tenure is wrong because the capitalized asset must be amortized consistently with the transfer of the goods or services under the specific contract that gave rise to the cost, not over an unrelated period tied to the employee's tenure. The option excluding all contract-obtaining costs from capitalization is wrong because paragraphs 91-94 specifically require capitalization of incremental costs of obtaining a contract as the general rule, with immediate expensing being the narrow exception.

Source: IFRS 15 Revenue from Contracts with Customers, paragraphs 91-94 (costs to obtain a contract)

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IFRS 15 paragraph 70 requires consideration payable to a customer that is not in exchange for a distinct good or service to be accounted for as a reduction of the transaction price, and therefore of revenue, recognized no earlier than the later of when the related revenue is recognized or when the payment is made or promised; the shelf-placement rebate here is not exchanged for any distinct good or service the retailer provides to the supplier, so it reduces the supplier's revenue rather than being reported separately. The option treating the rebate as a marketing expense separate from revenue is wrong because paragraph 70 specifically requires this type of payment to reduce revenue rather than be presented as an operating expense. The option conditioning the revenue reduction on the retailer being the end consumer is wrong because paragraph 70's requirement applies regardless of whether the immediate customer resells the goods further down the distribution chain. The option treating the rebate as additional revenue-generating consideration is wrong because payments made by a supplier to its customer under a related agreement fall squarely within the transaction-price guidance in IFRS 15, not outside its scope.

Source: IFRS 15 Revenue from Contracts with Customers, paragraph 70 (consideration payable to a customer)

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IFRS 16 paragraphs 20-21 require a lessee to reassess whether it is reasonably certain to exercise an extension option when a significant event or significant change in circumstances occurs that is within the lessee's control and affects that assessment; investing heavily in a new production line that depends on continued occupancy of the space is exactly such an event, so the lessee must reassess and, if its conclusion changes, revise the lease term and remeasure the lease liability accordingly. The option barring any reassessment after commencement is wrong because paragraphs 20-21 exist specifically to require reassessment during the lease term when qualifying triggers occur, not only at inception. The option limiting reassessment to a fixed annual cycle tied to the lease's inception anniversary is wrong because IFRS 16 ties reassessment to the occurrence of a qualifying triggering event, not to a calendar schedule. The option treating the situation as a lease modification requiring a renegotiated contract is wrong because nothing about the original contract's extension option or its terms has changed; modification accounting applies to a change in the scope or consideration of a lease agreed between lessor and lessee, not to a lessee's internal reassessment of its own intentions under an unchanged contract.

Source: IFRS 16 Leases, paragraphs 20-21 (reassessment of lease term)

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IFRS 16 paragraph 24 defines the cost of the right-of-use asset as the sum of the initial measurement of the lease liability, any lease payments made at or before commencement (less lease incentives received), any initial direct costs incurred by the lessee, and an estimate of costs to dismantle, remove, or restore the underlying asset or site under the lease's terms; every item described here therefore forms part of the asset's initial cost, with the incentive reducing rather than adding to that total. The option limiting the asset to only the lease liability's initial measurement is wrong because paragraph 24 explicitly adds the other listed components rather than treating them as separate expenses or provisions unrelated to the asset. The option excluding pre-commencement payments and incentives is wrong because paragraph 24 specifically includes payments made before commencement, net of incentives received, within the right-of-use asset's cost. The option limiting the asset to only the netted payment and incentive is wrong because it omits the lease liability's initial measurement and the initial direct costs, both of which paragraph 24 requires to be included, and because initial direct costs are added to, not expensed against, the asset.

Source: IFRS 16 Leases, paragraph 24 (initial measurement of the right-of-use asset)

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IFRS 16 paragraphs 61-62 classify a lease as a finance lease when it transfers substantially all the risks and rewards incidental to ownership to the lessee, and list indicators, including a lease term covering a major part of the underlying asset's economic life and a present value of lease payments amounting to substantially all of its fair value, that support this conclusion even without a transfer of legal title or a purchase option; both indicators are present here, so the lease is a finance lease. The option requiring title transfer or a purchase option for finance-lease classification is wrong because paragraphs 61-62 present title transfer and purchase options as indicators among several, not as mandatory conditions; a lease can qualify as a finance lease through other indicators alone. The option mandating operating-lease classification for all equipment leases is wrong because IFRS 16's lessor classification test turns on the transfer of risks and rewards, not on the category of underlying asset being leased. The option tying lessor classification to whichever exemption the lessee elects is wrong because IFRS 16 requires lessors to classify leases based on their own risks-and-rewards assessment, independent of any recognition exemption the lessee may apply under the lessee accounting model.

Source: IFRS 16 Leases, paragraphs 61-62 (lessor classification of leases)

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IFRS 16 paragraph 44 requires a lease modification to be treated as a separate lease only when it increases the scope of the lease by adding a right to use additional underlying assets at a commensurate standalone price; because this modification removes the right to use one floor rather than adding anything, it is not a separate lease, and paragraph 46 instead requires the lessee to remeasure the lease liability with a revised discount rate, decrease the right-of-use asset to reflect the partial termination, and recognize any resulting gain or loss in profit or loss. The option treating a scope reduction as giving rise to a new separate lease is wrong because paragraph 44's separate-lease treatment applies only to scope increases, not decreases. The option recognizing the full payment reduction as a profit-or-loss gain without adjusting the right-of-use asset is wrong because paragraph 46 specifically requires the carrying amount of the right-of-use asset to be decreased in proportion to the partial termination before any gain or loss is recognized. The option using the original discount rate and treating this as an index-driven remeasurement is wrong because a lease modification requires a revised discount rate determined at the effective date of the modification, unlike routine remeasurements triggered solely by changes in an index or rate.

Source: IFRS 16 Leases, paragraphs 44-46 (lease modifications)

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IFRS 15 paragraphs 60-65 require an entity to adjust the promised consideration for the effects of a significant financing component whenever the timing of payments agreed by the parties provides the customer or the entity with a significant benefit of financing. Paragraph 63's practical expedient only relieves an entity from making this adjustment when the period between transfer of the good and payment is expected, at contract inception, to be one year or less; here the deferral is 30 months, so the expedient does not apply. The manufacturer therefore recognizes revenue at delivery equal to the cash selling price -- what a customer would pay in cash at the time of transfer -- and separately accretes the discount on the outstanding receivable as interest income over the deferral period, distinct from revenue. The option denying any revenue recognition until cash is received applies pure cash-basis accounting, which IFRS 15 does not use; control transfers, and revenue is recognized, at delivery regardless of when cash arrives. The option assuming the expedient applies automatically to any deferral over 12 months has the threshold backwards: the expedient is available only when the period is one year or less, not when it exceeds one year, so a 30-month deferral falls outside it and requires the adjustment. The option treating the difference as interest expense paid to the customer misidentifies the direction of the financing: because the customer pays 30 months after the manufacturer performs, the manufacturer is extending credit to the customer and therefore earns interest income, not interest expense.

Source: IFRS 15 Revenue from Contracts with Customers, paragraphs 60-65 (existence of a significant financing component)

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IFRS 15 paragraph 20 requires a contract modification to be accounted for as a separate contract when the additional promised goods or services are distinct from those already promised and the price of the contract increases by an amount that reflects the entity's standalone selling price for those additional goods or services. The 20 extra units per month are the same distinct standard component, priced at its current standalone selling price, so both conditions in paragraph 20 are met: the modification is a separate contract, and the original contract continues to be accounted for exactly as it was before the modification, with no adjustment to revenue already recognized. The option calling for a cumulative catch-up adjustment is wrong because catch-up adjustments apply to changes in transaction price or measure-of-progress estimates within a single performance obligation, not to a modification that qualifies as a wholly separate contract under paragraph 20. The option combining the original and additional units into one blended-price performance obligation describes the prospective treatment paragraph 21 requires when the remaining goods are distinct but the additional goods are not priced at standalone selling price -- a different fact pattern from this one, where the standalone-selling-price condition is satisfied and paragraph 20's separate-contract treatment therefore governs instead. The option requiring full retrospective restatement from contract inception is wrong because IFRS 15's modification guidance is applied prospectively from the modification date; it never reopens revenue already recognized for performance obligations satisfied before the modification.

Source: IFRS 15 Revenue from Contracts with Customers, paragraphs 18-21 (contract modifications)

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IFRS 15 paragraph B63 requires that revenue for a sales-based or usage-based royalty promised in exchange for a license of intellectual property be recognized only when, or as, the later of two events occurs: the subsequent sale or usage occurs, and the performance obligation to which the royalty has been allocated has been satisfied. This specific requirement overrides the general variable-consideration estimation and constraint guidance whenever a royalty relates predominantly or solely to a license of intellectual property, as it does here. Because the license was already satisfied before the first quarter's sales, the later of the two events each quarter is simply the sale occurring, so the media company recognizes the royalty revenue as each quarter's covered sales happen. The option estimating total expected royalties up front and recognizing them at grant is wrong because it applies the general expected-value approach for variable consideration, which paragraph B63 specifically displaces for sales-based and usage-based royalties on licenses of IP. The option recognizing revenue on a straight-line basis over the license term is wrong because it ignores the royalty's dependence on actual sales entirely, substituting a time-based pattern the standard does not permit for this fact pattern. The option applying the general constraint on variable consideration and deferring recognition until a reversal is unlikely is wrong because paragraph B63 is a specific exception to that general constraint, not an instance of it, and it ties recognition to the occurrence of sales, not to resolving overall estimation uncertainty.

Source: IFRS 15 Revenue from Contracts with Customers, paragraph B63 (sales-based or usage-based royalties for licenses of intellectual property)

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IFRS 15 paragraph B66 explains that if an entity has an obligation or a right to repurchase the asset (a forward or a call option), the customer has not obtained control of the asset, because the customer is limited in its ability to direct the use of, and obtain substantially all the remaining benefits from, the asset even though it holds physical possession. When the repurchase price is greater than or equal to the original selling price, the arrangement is accounted for as a financing arrangement: the entity continues to recognize the asset, recognizes a financial liability for the consideration received, and recognizes the difference between the consideration received and the amount to be paid on repurchase as interest expense. Here the $115,000 repurchase price exceeds the $100,000 sale price, so the dealer keeps the equipment on its books, records a $100,000 financial liability, and recognizes the $15,000 difference as interest expense over the two years. The option recognizing immediate revenue and derecognizing the equipment is wrong because control never transferred to the customer in the first place; the repurchase obligation itself is what prevents control from passing, so there is no sale to recognize. The option characterizing the arrangement as an operating lease is wrong because the dealer, not the customer, retains the equipment as its own asset under a financing arrangement, not as a lessor renting out an asset it has derecognized in substance. The option recognizing revenue with a separate loss provision is wrong because no sale or revenue arises at all when a repurchase obligation prevents control from transferring; the transaction is financing income and expense, not sales revenue offset by a provision.

Source: IFRS 15 Revenue from Contracts with Customers, paragraphs B66-B69 (repurchase agreements: forwards and calls)

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IFRS 15 paragraphs B79-B82 permit revenue recognition on a bill-and-hold basis when, in addition to the general control-transfer criteria, all of the following are met: the reason for the bill-and-hold arrangement is substantive, the product is separately identified as belonging to the customer, the product is currently ready for physical transfer to the customer, and the entity does not have the ability to use the product or to direct it to another customer. The scenario satisfies each of these: the retailer's unready store is a substantive reason, the furniture is tagged as the customer's, it is complete and ready for shipment, and the manufacturer will not redirect it. Paragraph B82 also requires the manufacturer to consider whether it is providing a separate custodial service, which affects how the transaction price is allocated but does not change the conclusion that control of the furniture itself has transferred. The option treating physical possession as the only relevant indicator is wrong because IFRS 15 lists physical possession as just one of several indicators of control, not a controlling one, and the bill-and-hold guidance exists precisely because control can transfer before physical possession does. The option recognizing revenue based solely on invoicing and an unconditional right to payment is wrong because an enforceable payment obligation alone does not satisfy the bill-and-hold criteria; the goods must also be separately identified, ready for shipment, and not available for redirection. The option requiring treatment as a consignment sale is wrong because consignment arrangements involve a dealer holding another party's inventory pending resale to a third party, an entirely different fact pattern from a bill-and-hold sale where control has already passed to the named customer.

Source: IFRS 15 Revenue from Contracts with Customers, paragraphs B79-B82 (bill-and-hold arrangements)

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IFRS 16 paragraph B58 requires an intermediate lessor to classify a sublease by reference to the right-of-use asset arising from the head lease, rather than by reference to the underlying asset, unless the head lease is itself a short-term lease that the entity, as lessee, has accounted for using the short-term lease recognition exemption, in which case the sublease is classified as an operating lease. Since the head lease here runs ten years and is not short-term, the company must assess the sublease against the right-of-use asset it recognized for the head lease, not against the office floor's own remaining life and fair value. The option classifying the sublease against the underlying floor's own useful life and fair value is wrong because that is precisely the ordinary lessor approach paragraph B58 displaces for intermediate lessors; the relevant asset for comparison is the right-of-use asset, which typically has a much shorter remaining life than the underlying property. The option netting the head lease and sublease into one arrangement is wrong because IFRS 16 requires an intermediate lessor to account for the head lease and the sublease as two separate contracts, applying lessee accounting to one and lessor accounting to the other, rather than presenting a single net position. The option automatically mirroring the head lessor's own classification is wrong because the sublease's classification depends on the intermediate lessor's own assessment of the right-of-use asset it holds, not on how a different party, the original landlord, classified an entirely separate contract.

Source: IFRS 16 Leases, paragraph B58 (classification of a sublease by an intermediate lessor)

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Under IFRS 16, variable lease payments that do not depend on an index or a rate -- such as a percentage of a lessee's future sales -- do not meet the standard's definition of lease payments used to measure the lease liability and right-of-use asset. Because the 3%-of-sales rent depends entirely on the store's own future performance rather than on an index or rate, the retailer excludes it from the initial measurement of both the lease liability and the right-of-use asset, and instead recognizes it as an expense in profit or loss in the period in which the sales that trigger the payment actually occur. The option estimating total expected sales-based rent using the expected value method is wrong because that approach belongs to IFRS 15's variable consideration guidance for revenue contracts and is not how IFRS 16 treats non-index variable lease payments, which are excluded from measurement rather than estimated and capitalized. The option including a most-likely-amount estimate and updating it as sales come in is wrong for the same reason: IFRS 16 does not require or permit forecasting these uncertain, sales-dependent amounts into the lease liability at all. The option treating the sales-based rent the same as index-linked rent is wrong because index-linked or rate-linked variable payments are included in the initial lease liability measurement using the rate or index at commencement and remeasured when the index or rate changes, which is a fundamentally different mechanism from a payment tied to the lessee's own sales, a variable IFRS 16 deliberately excludes from that treatment.

Source: IFRS 16 Leases, paragraph 27 and Appendix A (variable lease payments not based on an index or a rate)

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IFRS 16 gives lessees two recognition exemptions with different units of election. The short-term lease exemption must be elected consistently by class of underlying asset to which the right of use relates, so an entity cannot apply it to some leases within a class, such as some delivery vans, while capitalizing other leases of the same class of asset. The low-value asset exemption, by contrast, may be elected on a lease-by-lease basis, so an entity can choose to exempt some individual low-value asset leases, such as some laptops, without needing to exempt every laptop lease. The company's plan to selectively exempt only some van leases therefore breaches the class-by-class requirement for short-term leases, while its plan to selectively exempt only some laptop leases is exactly what the lease-by-lease low-value asset election permits. The option denying any selectivity at all is wrong because the low-value asset election is explicitly available on a lease-by-lease basis. The option reversing the two rules, treating short-term leases as lease-by-lease and low-value assets as class-wide, is wrong because it has the two units of election backwards. The option allowing full selectivity for both elections is wrong because the short-term lease exemption specifically requires consistent application across the relevant class of underlying asset, not ad hoc selection among individual leases within that class.

Source: IFRS 16 Leases, paragraphs 5-8 (recognition exemptions: short-term leases and leases of low-value assets)

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IFRS 16 paragraph 100 requires that, when a transfer of an asset satisfies IFRS 15's requirements to be accounted for as a sale, the seller-lessee measures the right-of-use asset arising from the leaseback at the proportion of the previous carrying amount of the asset that relates to the right of use it retains, rather than at the present value of the future lease payments or the asset's full carrying amount. Because the right of use the seller-lessee retains is not remeasured to fair value as part of the transaction, only the gain or loss relating to the rights transferred to the buyer-lessor is recognized, determined using the same proportion used to measure the right-of-use asset; the retained 20% proportion of the $600,000 carrying amount becomes the right-of-use asset, and only the gain attributable to the 80% of rights transferred is recognized in profit or loss. The option recognizing the full $400,000 gain while separately measuring the right-of-use asset at the present value of future lease payments is wrong because paragraph 100 caps recognized gain at the proportion relating to transferred rights and measures the right-of-use asset from the proportion of previous carrying amount retained, not from the leaseback payments. The option treating the transaction as a failed sale is wrong because the facts state the bank obtained control and the transfer qualifies as a sale under IFRS 15; a short leaseback term relative to the asset's life does not by itself defeat a control transfer that has already been established. The option deferring the entire gain and amortizing it over the leaseback term reflects the superseded IAS 17 deferred-gain approach, which IFRS 16 replaced with the proportionate-gain method in paragraph 100.

Source: IFRS 16 Leases, paragraph 100 (sale and leaseback: measuring the right-of-use asset and gain on a qualifying sale)

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Under IFRS 16, a lessor's net investment in a finance lease is defined as the sum of the lease payments receivable and any unguaranteed residual value accruing to the lessor, both discounted at the interest rate implicit in the lease -- the rate that causes the present value of the lease payments and the unguaranteed residual value to equal the sum of the fair value of the underlying asset and any initial direct costs incurred by the lessor. This rate is specific to the lessor's own agreement, embedding the lessor's initial direct costs directly into the measurement without a separate add-on step. The option excluding the unguaranteed residual value and discounting only the lease payments at the lessor's incremental borrowing rate is wrong on two points: unguaranteed residual value is explicitly included in the net investment, and the discount rate used is the rate implicit in the lease, not the lessor's own borrowing rate. The option carrying the machinery at unadjusted fair value throughout the lease term is wrong because a finance lease is accounted for as a receivable, the net investment in the lease, not as an asset held and measured at fair value. The option discounting using the lessee's incremental borrowing rate is wrong because the lessee's incremental borrowing rate is relevant to the lessee's own lease liability measurement when the rate implicit in the lease cannot be readily determined; the lessor's net investment measurement always uses the rate implicit in the lease, a rate the lessor itself calculates.

Source: IFRS 16 Leases, paragraphs 68 and Appendix A (lessor's net investment in a finance lease; interest rate implicit in the lease)

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Under IFRS 15 paragraphs B39-B43, an option to acquire additional goods or services gives rise to a separate performance obligation only if it provides the customer a material right that it would not otherwise receive -- for example, a discount that is incremental to the range the company typically grants that class of customer in that market. Because the renewal discount here goes beyond the company's normal renewal pricing, the option is a material right, so part of the transaction price must be allocated to it and recognized as revenue when the future subscription is transferred or when the option expires unexercised. Treating every discounted option as an automatic performance obligation is wrong because paragraphs B39-B43 condition that treatment specifically on the discount being incremental to normal pricing, not on the mere existence of any discount. Disregarding the option as an unrelated future transaction is wrong because a material right embedded in the current contract is explicitly within the scope of the existing contract's performance obligations, not a separate transaction. Classifying the incentive as marketing expense is wrong because a material right is accounted for as revenue allocated to a performance obligation, not as an expense, regardless of how the incentive is labelled commercially.

Source: IFRS 15 Revenue from Contracts with Customers, paragraphs B39-B43 (customer options for additional goods or services)

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IFRS 15 paragraphs B48-B49 address non-refundable upfront fees such as health club joining fees, activation fees, and setup fees, explaining that although these fees relate to an activity the entity performs at or near contract inception, that setup activity typically does not itself transfer a promised good or service to the customer. Because no distinct good or service is transferred in exchange for the joining fee specifically, the fee is in substance an advance payment for the future membership services and must be recognized as revenue over the period those future services are provided, not immediately. The option recognizing the entire fee immediately is wrong because the label 'non-refundable' does not by itself justify immediate recognition; what matters is whether a distinct good or service was transferred, and here none was. The option netting the fee against acquisition costs is wrong because the fee is consideration received from the customer for future services, unrelated to how the club separately accounts for its own commission costs. The option deferring the fee indefinitely is wrong because the fee is recognized progressively as the future membership services are actually provided, not withheld from revenue altogether while the member is active.

Source: IFRS 15 Revenue from Contracts with Customers, paragraphs B48-B49 (non-refundable upfront fees)

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IFRS 15 paragraphs B77-B78 require an entity that delivers a product to another party, such as a dealer or retailer, to evaluate whether that party has obtained control of the product at the point of delivery; indicators that control has not transferred include the entity retaining the ability to require the product's return or to redirect it to another party, and the product remaining under the entity's control until a specified event, typically its sale to an end customer. Because the manufacturer here retains exactly that ability and that control, the sofa is held on consignment, so no revenue is recognized on delivery to the store; revenue is recognized only when the store sells the sofa onward. The option recognizing revenue on physical delivery alone is wrong because physical possession without control transfer, as evidenced by the retained recall and redirect rights, does not satisfy IFRS 15's control-based recognition criterion. The option treating this as an ordinary sale with a right of return is wrong because a right-of-return sale involves control transferring to the customer at delivery with a subsequent contingent reversal, whereas a consignment arrangement means control never transferred to the store in the first place. The option spreading revenue over an estimated holding period is wrong because revenue recognition under a consignment arrangement is triggered by the specific event of sale to the end customer, not by the passage of an estimated average time period.

Source: IFRS 15 Revenue from Contracts with Customers, paragraphs B77-B78 (consignment arrangements)

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IFRS 15 paragraph 95 permits capitalizing costs incurred to fulfil a contract only when those costs generate or enhance resources that will be used to satisfy performance obligations in the future; paragraph 98 specifically requires costs such as wasted materials, labor, or other resources used to fulfil the contract that were not reflected in the contract price to be expensed as incurred, because they do not generate or enhance any future resource -- they simply reflect inefficiency that has already occurred. Wasted material here is discarded rather than incorporated into anything the contractor will use going forward, so it fails the capitalization test in paragraph 95 and must be expensed immediately. The option capitalizing every cost incurred during an active contract is wrong because paragraph 95's criteria require the cost to generate or enhance a future resource, a test wasted material specifically fails. The option treating the waste as a transaction-price reduction is wrong because a cost the contractor incurs to fulfil its own obligations is not consideration owed to or from the customer, and the transaction price is unaffected by the contractor's internal inefficiency. The option deferring the expense until contract completion is wrong because paragraph 98 requires immediate expensing of exactly this type of cost, not deferral to a later reporting period.

Source: IFRS 15 Revenue from Contracts with Customers, paragraphs 95-98 (costs to fulfil a contract)

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IFRS 15 paragraph 63 provides a practical expedient allowing an entity to forgo adjusting the promised consideration for the effects of a significant financing component whenever the entity expects, at contract inception, that the period between transferring the promised goods or services and the customer's payment will be one year or less. The eight-month gap here falls within that one-year threshold, so the wholesaler may apply the expedient and account for the contract without any separate financing adjustment. The option requiring a financing component calculation regardless of gap length is wrong because it inverts the expedient's actual condition, which is available precisely when the gap is a year or less, not only when there is no gap. The option conditioning the financing component's existence on the customer's motive for requesting the timing is wrong because paragraph 63's expedient turns on the length of the expected payment gap, not on why the customer negotiated that particular timing. The option limiting the expedient to service contracts is wrong because paragraph 63 applies to the transfer of any promised goods or services, with no such restriction to services only.

Source: IFRS 15 Revenue from Contracts with Customers, paragraph 63 (significant financing component practical expedient)

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IFRS 16 paragraph 15 gives a lessee a practical expedient to elect, by class of underlying asset, not to separate non-lease components such as maintenance services from the associated lease component, and instead to account for the lease component and non-lease component together as a single lease component. This election must be made and applied consistently across the whole class of underlying asset, such as all warehouse buildings, rather than lease by lease, which is exactly what the retailer has done here, so the policy is permitted. The option asserting that combination is never permitted is wrong because paragraph 15 exists specifically to allow this combination as an accounting policy choice. The option restricting the expedient to short-term leases is wrong because paragraph 15's practical expedient is a general election available for any class of underlying asset, with no length restriction of that kind. The option asserting the expedient is available only to lessors is wrong because paragraph 15 is a lessee practical expedient; lessors are in fact the party that IFRS 16 requires to always separate lease and non-lease components, the opposite restriction.

Source: IFRS 16 Leases, paragraph 15 (practical expedient -- non-lease components)

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IFRS 16 paragraph B42 explains that some lease payments structured as variable are, in substance, unavoidable and are therefore treated as in-substance fixed payments, included within the lease payments used to measure the lease liability at commencement despite their variable form. Here, the minimum operating-hours requirement is realistically certain to be met given the store's business model, so the resulting minimum rent amount is unavoidable in substance even though the contract labels it as variable, and it must be included in the initial lease liability measurement. The option excluding the entire payment purely because of its contractual label is wrong because paragraph B42's test looks past the form of a payment to its substance, and a payment that is unavoidable in substance is captured regardless of how it is described. The option including the amount only once a shortfall actually occurs is wrong because the in-substance fixed portion is identified and measured at lease commencement based on what is realistically unavoidable, not retrospectively triggered by an actual breach. The option treating the amount as a separate IFRS 9 financial liability is wrong because a payment for the right to use the underlying asset under the lease contract is a lease payment within the scope of IFRS 16, not a separate financial instrument governed by a different standard.

Source: IFRS 16 Leases, paragraph B42 (in-substance fixed payments)

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IFRS 16 paragraph 4 permits an entity to apply the Standard to a portfolio of leases with similar characteristics, using estimates and assumptions that reflect the size and composition of that portfolio, whenever the entity reasonably expects the financial statement effects of the portfolio-level approach would not differ materially from applying the Standard lease by lease. This is a general practical expedient available whenever that materiality condition is met, not a one-time transition-only allowance, so the company's approach here is permitted as long as it reasonably expects no material difference from individual measurement. The option requiring separate treatment in all circumstances is wrong because paragraph 4 exists specifically to permit portfolio-level application when its materiality condition holds. The option restricting the approach to the year of initial adoption is wrong because paragraph 4 is a standing provision within the recognition and measurement requirements, available for leases entered into at any time, not limited to a transition period. The option restricting the approach to short-term or low-value leases is wrong because the portfolio approach in paragraph 4 is a distinct, general provision, unrelated to and not conditioned on the separate short-term or low-value asset exemptions.

Source: IFRS 16 Leases, paragraph 4 (portfolio approach)

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IFRS 16 paragraph 33 requires a lessee measuring its right-of-use asset under the cost model to apply IAS 36 Impairment of Assets to determine whether the asset is impaired and, if it is, to measure and recognize the resulting impairment loss, placing the right-of-use asset within the same impairment framework the lessee already applies to its owned property, plant, and equipment. Because IFRS 16 defers entirely to IAS 36 rather than creating its own impairment mechanism, the factory's right-of-use asset is tested and, if necessary, written down exactly as an owned factory building would be. The option describing a standalone impairment test within IFRS 16 itself is wrong because IFRS 16 paragraph 33 explicitly incorporates IAS 36 rather than setting out its own separate impairment criteria. The option asserting no impairment test applies, with only lease liability remeasurement occurring, is wrong because the right-of-use asset and the lease liability are distinct items; a decline in the asset's recoverable amount is addressed through IAS 36 impairment of the asset, not through remeasuring the liability. The option applying the IAS 37 onerous contract framework is wrong because IFRS 16 superseded the previous onerous-lease approach for lessees that recognize a right-of-use asset; once a lease is on-balance-sheet under IFRS 16, its asset-side impairment is governed by IAS 36, not by IAS 37's provision-based model.

Source: IFRS 16 Leases, paragraph 33 (impairment of right-of-use assets -- IAS 36)

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IFRS 15 paragraph 21(b) requires that when the remaining goods and services to be provided under a modification are not distinct from those already transferred as part of a single, partially satisfied performance obligation, the entity accounts for the modification as if it were part of the original contract; the entity updates its measure of progress toward the combined performance obligation and recognizes the cumulative effect of that updated progress as an adjustment to revenue at the date of the modification, a cumulative catch-up adjustment. Because the expanded scope here is inseparable from the single integrated system already being built, that is exactly the treatment required. The option treating the modification as a separate contract with a new distinct obligation is wrong because paragraph 21(b) applies precisely because the remaining goods and services are not distinct, which rules out the separate-contract treatment reserved for modifications involving genuinely distinct additional goods or services. The option terminating the original contract and resetting progress to zero is wrong because paragraph 21(b) requires continuing to measure progress toward the same combined obligation on a cumulative basis, not discarding progress already recognized. The option deferring all revenue effect until final completion is wrong because the cumulative catch-up adjustment is recognized at the date of the modification itself, reflecting progress to date under the revised scope, not postponed until the project eventually finishes.

Source: IFRS 15 Revenue from Contracts with Customers, paragraph 21(b) (contract modifications -- remaining goods not distinct)