Revenue – ifrs 15 handbook

 
Additional application examples
Example 6 – Applying the over-time criteria: Bottle manufacturer
Company C enters into a framework agreement to manufacture bottles for 
Customer B under the following terms.
– The design of the bottles is the IP of B. 
– The sales price is cost plus 10%.
– There is no stated minimum purchase quantity.
– C is required to maintain a specific level of inventory of raw materials and 
finished goods.
– If B terminates the framework agreement, then it is required to purchase 
inventory of raw materials at cost and work in progress and finished goods 
on hand at the agreed sales price at the date of termination.
– The manufacturing process does not result in material amounts of work 
in progress.
C determines that the nature of the promise to B under the framework 
agreement is to manufacture bottles for use in B’s operation. 
C applies the over-time criteria and determines that it does not create an asset 
with an alternative use because C is legally prevented from selling the asset 
to another customer. The contract’s termination clause provides C with an 
enforceable right to payment for its performance completed to date – i.e. for 
costs incurred plus a reasonable margin. C therefore determines that Criterion 3 
is met.
Because Criterion 3 is met, C recognises revenue over time as it manufactures 
bottles.
Example 7A – Applying the over-time criteria: Real estate developer: 
Criterion 3 not met (1)
Real Estate Developer D in Country Y enters into a contract with Customer C 
for the sale of a real estate unit in a multi-unit residential complex. The contract 
contains the following terms. 
– C pays a 10% deposit at contract inception and the remainder of the 
purchase price after construction is complete. 
– D retains legal title until C has paid the full purchase price.
– C has the right to terminate the contract at any time before construction 
is complete.
– On termination, D is required to make reasonable efforts to resell the unit to a 
third party.
– If the resale price obtained from the third party is less than the original 
purchase price in the contract with C, then C must pay the difference to D.

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130 | Revenue – IFRS 15 handbook
IU 03-18
D applies the over-time criteria and determines that its performance does 
not create an asset with an alternative use under Criterion 3. However, 
the consideration to which D is entitled from C on termination is limited to 
reimbursement of any loss of profit on resale. This does not approximate to the 
selling price of the part-constructed real estate unit, and therefore does not 
compensate D for its performance completed to date. Based on its analysis, D 
concludes that Criterion 3 is not met.
Because Criterion 3 is not met, D recognises revenue at the point in time when 
control of the unit transfers to C (see 
Section 5.4
).