Revenue – ifrs 15 handbook

Example 14 – Combination of contracts: Equipment and 
modification services
Company X sells equipment, Product P. P functions as designed without any 
customisation or modification services and can be installed at a customer site 
without X’s assistance. 
X enters into a contract with Customer R to sell P. After 45 days, X and R enter 
into a separate agreement for X to provide services to modify R’s equipment P. 
The services include significant modification of P that enhances and changes 
its functionality. 
Although they are executed separately, the two agreements are negotiated 
during the same time period (even though commencement and completion of 
the negotiations are not held over the same period) and largely by the same X 
and R personnel. 
X concludes that, if the two contracts were combined, P and the service to 
customise P would be a single performance obligation (see 
Chapter 2
). X also 
concludes that the two agreements were negotiated as a package with a single 
commercial objective – i.e. to enable R to use the customised equipment. 
Therefore, because the contract for P and the services agreement are entered 
into near the same time, the two agreements constitute a single contract. 
X accounts for the transfer of P and the customisation services as a single 
performance obligation.

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1 Step 1 – Identify the contract with a customer | 21
1.4 Combination of contracts
| 
Evaluating ‘at or near the same time’ when determining whether 
contracts should be combined
IFRS 15.BC68
The accounting for a contract depends on an entity’s present rights and 
obligations, rather than on how the entity structures the contract. The standard 
does not provide a bright line for evaluating what constitutes ‘at or near the 
same time’ to determine whether contracts should be combined for the 
purpose of applying the standard. Therefore, an entity should evaluate its 
specific facts and circumstances when analysing the elapsed period of time. 
Specifically, the entity should consider its business practices to determine 
what represents a minimum period of time that would provide evidence that 
the contracts were negotiated at or near the same time. Additionally, the entity 
should evaluate why the arrangements were written as separate contracts and 
how the contracts were negotiated (e.g. both contracts negotiated with the 
same parties vs different divisions within the entity negotiating separately with 
a customer).
An entity needs to establish procedures to identify multiple contracts initiated 
with the same customer on a timely basis to ensure that these arrangements 
are evaluated to determine whether they should be combined into a single 
contract for accounting purposes.
In addition, an entity should consider whether a separate agreement is a 
modification to the original agreement and whether it should be accounted for 
as a new contract or as part of the existing contract. For a discussion of contract 
modifications, see 
Chapter 8
.