Revenue – ifrs 15 handbook

Alternative approach not limited to renewal options
IFRS 15.B43
We believe that the alternative approach is not limited to contract renewals (e.g. 
a right to renew a service contract on the same terms for an additional period). 
It may also be applied to other types of material rights – e.g. options to purchase 
additional goods or services at a discounted price when the optional goods or 
services are similar to those offered in the contract.
For example, we believe that an entity could apply the alternative approach to 
a prospective volume rebate arrangement. Under the alternative approach, the 
entity would allocate the transaction price with reference to the total number 
of goods that it expects the customer to purchase under the agreement and 
the corresponding expected total consideration from those purchases – i.e. 
revenue would be recognised at the average price per unit based on total 
expected purchases.

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276 | Revenue – IFRS 15 handbook
More than one acceptable approach to determine the expected 
goods or services to be provided
The standard does not provide detailed guidance on how to determine the 
amount of expected goods or services to be provided. The following are 
acceptable approaches to determining this amount.
– 
Contract-by-contract basis:
Under this approach, an entity considers each 
option that provides the customer with a material right to be a ‘good or 
service that is expected to be provided’ unless it expects the customer’s 
right to expire unexercised. For example, if an entity includes a renewal 
option with a contract price of 100 and a 60 percent probability of being 
exercised, then the entity includes 100 in the hypothetical transaction 
price rather than 60. This is because 100 is the ‘corresponding expected 
consideration’ for the additional good or service. The entity would then 
allocate the hypothetical transaction price (which includes 100) to all of the 
expected goods or services, including the renewal option on a relative stand-
alone selling price basis.
– 
Portfolio approach:
Under this approach, an entity estimates the number 
of goods or services expected to be provided based on historical data for a 
portfolio of similar transactions. For example, an entity enters into 100 similar 
annual contracts with two optional renewal periods around the same time. 
The entity estimates the number of expected renewals for the portfolio to 
estimate the transaction price and allocate consideration to the initial and 
renewal contracts. 
Under both approaches, if the actual number of options exercised is different 
from what the entity expected, then the entity updates the transaction price 
and revenue recognised accordingly. We believe that it is acceptable to adjust 
the number of expected goods or services during the period(s) for which a 
material right exists, on either a cumulative catch-up or prospective basis, as 
long as the entity establishes a policy for the approach that it uses and applies 
it consistently.