Revenue – ifrs 15 handbook

Example 8 – Contract term: Economic incentives
Company X enters into a month-to-month wireless contract with Customer 
Y that includes a handset and voice and data services. Y makes no up-front 
payment for the handset, but will pay the stand-alone selling price of the 
handset through monthly instalments over a 12-month period. If Y fails to renew 
the monthly wireless contract, then the remaining balance for the handset 
becomes due immediately.
In addition, Y pays a monthly service fee for the voice and data services, which 
represents their stand-alone selling price. The contract does not include any 
payments other than for the handset and the services.
In assessing the enforceability of the contract, X considers the amounts due if 
Y decides not to renew at the end of Month 1. X observes that the requirement 
to repay the remaining balance for the handset when the service contract is not 
renewed is an economic incentive for Y to renew. We believe that this economic 
incentive is not a substantive termination penalty, but instead is a repayment of 
a loan for goods already transferred.
Because X cannot enforce the service contract for a period longer than 
one month, X concludes that the contract term is one month.
Example 9 – Contract term: Cancellation without penalty after a 
specified period
Contractor S enters into a manufacturing contract to produce 50 specialised 
sensors for Customer C for a fixed price of 2,000 per sensor. C can cancel the 
contract without a penalty after receiving 10 sensors. 
S determines that because there is no substantive compensation amount 
payable by C on termination of the contract – i.e. no termination penalty in the 
contract – it is akin to a contract to produce 10 sensors that gives C an option to 
purchase an additional 40 sensors.
Example 10 – Contract term: Cancellable without penalty
Company X contracts with Customer R to provide its service offering for a flat 
fee of 130 per month, subject to annual increases based on the lesser of 2% or 
changes in the consumer price index (CPI). The stand-alone selling price for this 
service is 130. The contract term is indefinite and it is cancellable at the end of 
each month by either party without penalty. 
X determines that the initial contract term is only one month and that the contract 
term will always be one month under this arrangement. This is because each party 
has the unilateral, enforceable right to terminate the contract at the end of the 
then-current month without compensating the other party.
A new contract is deemed to exist each month once each party chooses not to 
use its cancellation right for that period.

---

© 2019 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
16 | Revenue – IFRS 15 handbook