Step 2: Identify the Performance Obligations in the contract
recognized, when a customer obtains control of the asset or
Each promise to transfer the following is a performance benefits from the services provided. Performance obligations will
obligation to be accounted for separately: be satisfied either at a point in time or over a period of time.
a. A distinct good or service (or a distinct bundle of goods or At a point in time- a company has to go through the criteria to determine if
services); or b. A series of distinct goods or services that are a performance obligation is satisfied over time. Then the performance
substantially the same and have the same pattern of transfer to the obligation is satisfied and revenue recognized at the point in time when
customer control of the good or service is transferred to the customer.
A promised good or service is distinct if: • Over a period of time- a performance obligation is satisfied and revenue is
a. The customer can benefit from the good or service either on its recognized over time if any one of the following are met:
own or together with other resources that are readily available to
the customer; and The customer simultaneously receives and consumes the benefits
b. The promise to transfer the good or service is separately provided by the entity’s performance as the entity performs.
identifiable from other promises in the contract.
The entity’s performance create or enhance an asset that the customer
Customer can benefit: controls as the asset is created or enhanced.
A customer can benefit from a good or service if the good or
service could be used, consumed, sold for an amount that is The entity’s performance does not create an asset with an alternative use
greater than scrap value or otherwise held in a way that to the entity and the entity has an enforceable right to payment for
performance completed to date.
generates economic benefits. The fact that the entity regularly
sells a good of service separately indicates that a customer can Separately identifiable:
benefit from the good or service on its own or with other readily A promise to transfer a good or service is separately identifiable
available resources. if the good or service:
a. is not an input to a combined output specified by the customer.
Performance obligations are satisfied and revenue can be b. does not significantly modify another good or service promised
in the contract. good or service does not affect the other promised goods or services in
c. is not highly interrelated with other goods promised in the contract. the contract.
For example, the customer's decision or services of not purchasing a
Specific principles: ('Licensing' section)
Licensing contracts can include additional promises for goods or services. These promises
can be explicit in the contract or implied by customary business practices.
To identify each performance obligation in the contract, the entity should: Apply
the general principles outlined in "Step 2."
Treat it similar to how performance obligations are identified in other contract types.
Promise to grant license is not distinct
Promise to grant a license may not be distinct
All promises are accounted for together
Determination of timing
Promise to grant licensed is performance obligation
- promise is satisfied over time or
distinct
at a point in time
- treated as a separate - the entity examines the type of
rights granted by the license should be met for a customer to
• right to access have the right to access the
• right to use entity's intellectual property
- If the customer has the right to
access the intellectual property,
it's considered a performance
obligation satisfied over time
Right to access
- There are following criteria that
Right to use - The customer has the right to use the entity’s which may affect the entity’s ability to provide future
intellectual property as it exists at the point in time at which licenses; however, those activities would not affect
the license is granted if the customer can direct the use of, the
and obtain substantially all the remaining benefits from, the determination of what the license provides or what
license at the point in time in which the license is granted. the customer controls.
This is the case if the intellectual property to which the
customer has rights will not change. INDICATORS OF TRANSFER OF CONTROL:
Indicators of transfer of control when determining the
Right to use - Any activities undertaken by the entity
point in time at which the license transfers to the
merely changes its own asset (i.e the underlying IP),
customer: a. The entity has a present right to payment
for the asset b. The customer has legal title to the asset use”, revenue from sales-based or usage-based royalty
c. The entity has physical possession of the asset d. The is recognized only when (or as) the later of the following
customer has the significant risks and rewards of events occurs: a. The subsequent sale or usage occurs;
ownership of the asset and
e. The customer has accepted the asset b. The performance obligation to which the sales-based
Right to use: or usage-based royalty has been allocated has been
however, revenue shall not be recognized before the point satisfied (or partially satisfied)
in time where the customer is able to use the license. For
example, if a software license period begins before an entity
provides to the customer a code that enables it to use the
software, no revenue is recognized before that code is
provided.
Factors that are disregarded whether a license
provides a right to access or right to use: Key points :
a. Time, geographical or use restrictions – focuses
more on the attributes of the license rather than the
performance obligation 1.Distinct Goods or Services
b. Guarantee that the entity will defend a patent from
unauthorized use – more of a protection rather than 2. Identification of Performance Obligations 3. Revenue
being a performance obligation
Recognition
Sales-based or usage-based royalties
Whether a license is distinct or not, and whether a Illustration: Identifying a distinct license (Based on IF
distinct license provides a “right to access” or “right to RS 15.IE281-285)
A. The customer can benefit from the license
An entity, a pharmaceutical company, licenses to a
customer its patent rights to an approved drug compound
for 10 years and also promises to manufacture the drug for
the customer. The drug is a mature product; therefore the
entity will not undertake any activities to support the drug, Example of common partcs of contracts that
which is consistent with its customary business practices.
are:
Case 1: License is not distinct A. NOT Performance Obligation:
1.
without the manufacturing service.
No other entity can manufacture this drug because of the
highly specialized nature of the manufacturing process.
2.
As a result, the license cannot be purchased separately
B. The promises are separately identifiable from
from the manufacturing services.
Case 2: License is distinct
The manufacturing process used to produce the drug is
3.
not unique or each other.
specialized and several other entities can also Prepayments
manufacture the drug for the customer. Quality-assurance warranty Right of return
Conclusion:
B. Performance Obligation:
Two separate performance obligations:
1.
(1) License of patent rights
2.
(2) Manufacturing service
Application of the Specific principles:
The customer has the right to use the entity's
intellectual property as it exists at a point in time.
Accordingly, the performance obligation to provide
the license is satisfied at a point in time.
Extended warranties
Options that provide a material right
