Revenue – ifrs 15 handbook

Example 9 – Automotive supplier: Pre-production activities are not 
distinct from prototype
Automotive Supplier S enters into a contract with Carmaker B to supply a 
prototype of a specialised component as part of a new product that B is 
developing. The component is based on a newly developed technology and 
supplying it will require extensive pre-production engineering activity. According 
to the contract, B has the right to the IP resulting from S’s activities and S 
is obliged to provide periodic updates on its development process, which B 
requires for the development of other parts of the product.
B guarantees that S will be compensated for the costs of the engineering 
activities, including a reasonable margin. However, B does not commit to a 
minimum quantity of parts. Any subsequent purchase order will be priced in 
accordance with its stand-alone selling price. Therefore, S observes that the 
contract does not include a promise to produce additional components. Further, 
it concludes that the contract does not provide a material right to purchase 
components at a discount (see 
Section 10.4
).
S concludes that it effectively transfers the know-how arising from its pre-
production activities to B. Therefore, it identifies two promises in its contract 
with B: 
– pre-production engineering activities; and
– production of a component prototype.
Criterion 1
Capable of being distinct
S assesses the promises in the contract and determines that 
each of the promised goods and services is capable of being 
distinct. This is because B can benefit from the IP generated 
by the pre-production activities using readily available 
production services offered by other suppliers. S can also 
produce the prototype using IP that it has already transferred 
to B.
Criterion 2