Revenue – ifrs 15 handbook

Example 7 – Applying practical expedient 3
Manufacturer M entered into a contract with Customer C to manufacture, sell 
and service a complex piece of machinery, which began on 1 April 2014 for 
a fixed amount of consideration of 2 million. The contract is expected to be 
completed by 31 December 2018.
Before the start of the earliest period presented – i.e. 1 January 2017 – the 
contract was modified numerous times, changing both the scope of work 
and the amount of consideration. All of these modifications were agreed and 
approved before 31 December 2016.
At 1 January 2017, M determines that the modified contract includes two 
performance obligations under the new standard: 
– the item of machinery, the specification of which has been modified since 
contract inception; and 
– repair and maintenance services. 
The modified amount of consideration is: 
– a fixed amount of 3 million; and 
– an additional amount of up to 200,000 if certain production levels are 
attained.
If M does not elect to apply practical expedient 3, then it assesses each contract 
modification separately and accounts for each under the guidance on contract 
contract as a single performance obligation for a fixed amount of 2 million 
and then it applies the contract modification guidance to account for each 
modification to the contract up to 1 January 2017. 
Conversely, if M elects to use practical expedient 3 then it does not separately 
evaluate the effects of each modification before the start of the earliest period 
presented. Instead, it considers the aggregate effect of all modifications – i.e. 
the contract as modified for scope and price as of 1 January 2017. Under this 
approach, as of 1 January 2017 M determines the transaction price, identifies 
the performance obligations in the contract (both satisfied and unsatisfied) 
and allocates the transaction price to the performance obligations. However, 
it applies the contract modification guidance to account for each contract 
modification (if there are any) that occurs after 1 January 2017.

---

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