A software company builds custom accounting software for a client under a contract with no alternative use to the company, because the software is tailored specifically to the client's systems, and which entitles the company to invoice and collect payment for work performed to date if the client cancels the contract for reasons other than the company's own non-performance. No other transfer-of-control indicator applies. Under IFRS 15, should the company recognize the related revenue over time or at a point in time, and why?
- Over time, because the asset created has no alternative use to the company and the company has an enforceable right to payment for performance completed to date, satisfying one of the three criteria in paragraph 35 for recognizing revenue over time
- At a point in time, because revenue can only be recognized over time when the customer simultaneously receives and consumes the benefits of the company's performance as the company performs, and no other criterion in paragraph 35 can independently support over-time recognition
- At a point in time, because custom software is a good rather than a service, and IFRS 15 always recognizes revenue for the transfer of goods only when physical or constructive delivery occurs
- Over time, because the contract exists and the company expects to be paid, which alone is sufficient under IFRS 15 to recognize revenue as costs are incurred regardless of whether control of anything has transferred to the customer
Why A? And why not the others?
Correct answer: A. Over time, because the asset created has no alternative use to the company and the company has an enforceable right to payment for performance completed to date, satisfying one of the three criteria in paragraph 35 for recognizing revenue over time
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)