Revenue – ifrs 15 handbook

Example 7 – Automotive supplier: Contract exists for engineering 
services but not for supply of parts
On 1 January, Carmaker G approves Automotive Supplier S’s offer to 
manufacture a specialised part for its cars. G and S agree that S will also 
perform engineering and design (E&D) activities on behalf of G, necessary for 
the production of the part. S concludes that these pre-production activities 
transfer a service to G. The framework agreement between G and S does not 
specify a separate price for E&D services, but the price of each part includes 
a mark-up to compensate S for the E&D services. The framework agreement 
does not state a minimum quantity of parts to be ordered by G.
The agreement also contains a termination clause under which S will be 
reimbursed for any costs incurred for the E&D services if G terminates the 
agreement.
On 1 April, S completes the E&D activities. 
On 1 December, G orders the first batch of parts. 
S concludes that on 1 January no enforceable rights and obligations arise in 
relation to the parts, because the agreement does not establish minimum 
quantities of parts to be purchased. However, because the termination clause 
in the agreement guarantees compensation for the E&D activities, a contract 
exists for the E&D services under the revenue standard.
1.2
Contract term
IFRS 15.11
The standard is applied to the duration of the contract (i.e. the contractual period) in 
which the parties to the contract have presently enforceable rights and obligations.
IFRS 15.12
A contract does not exist if each party to the contract has the unilateral enforceable 
right to terminate a wholly unperformed contract without compensating the other 
party (or parties). 
A contract is ‘wholly unperformed’ if both of the following criteria are met:
– the entity has not yet transferred any promised goods or services to the 
customer; and 
– the entity has not yet received, and is not yet entitled to receive, any 
consideration in exchange for promised goods or services.
It appears that an economic incentive to renew a contract is not relevant when 
evaluating the term of the contract because it does not give rise to enforceable 
rights or obligations.

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1 Step 1 – Identify the contract with a customer | 15
1.2 Contract term
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