Revenue – ifrs 15 handbook

Contract term affects many parts of the standard
The determination of the contract term is important because it may affect 
the measurement and allocation of the transaction price, the collectability 
assessment, the timing of revenue recognition for up-front non-refundable fees, 
contract modifications, and the identification of material rights.
Consideration payable on termination can affect assessment of 
contract term
If a contract can be terminated by compensating the other party and the right to 
compensation is considered substantive, then its duration is either the specified 
period or the period up to the point at which the contract can be terminated 
without compensating the other party.
However, if a contract can be terminated by either party without substantive 
compensation, then its term does not extend beyond the goods and services 
already provided. 
In making the assessment of whether the right to compensation is substantive, 
an entity considers all relevant factors, including legal enforceability of the right 
to compensation on termination. If an entity has a past practice of not enforcing 
a termination penalty and that practice changes the legally enforceable rights 
and obligations, then that could affect the contractual term.
Compensation is broader than only termination payments
A payment to compensate the other party on termination is any amount (or 
other transfer of value – e.g. equity instruments) other than a payment due as 
a result of goods or services transferred up to the termination date. It is not 
restricted only to payments explicitly characterised as termination penalties.
Ability of either party to cancel the contract at discrete points in 
time may limit the contract term
If an entity enters into a contract with a customer that can be renewed or 
cancelled by either party at discrete points in time without significant penalty, 
then it accounts for its rights and obligations as a separate contract for the 
period during which the contract cannot be cancelled by either party. On 
commencement of each service period (e.g. a month in a month-to-month 
arrangement), in which the entity has begun to perform and the customer 
has not cancelled the contract, the entity normally obtains enforceable rights 
relative to fees owed for those services and a contract exists.

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1 Step 1 – Identify the contract with a customer | 17
1.3 Consideration received before a contract exists
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