Revenue – ifrs 15 handbook

Example 15 – Determining whether an arrangement has a 
significant financing component: Payment in advance
Technology Company T signs a three-year, non-cancellable agreement with 
Customer C to provide hosting services. C may elect to pay either:
a. 140 per month (total payment is 5,040); or
b. 4,200 at the beginning of the contract term, with no additional monthly 
payments.
T determines that the contract includes a financing component. 
The difference in pricing between options (a) and (b) indicates that the 
contractual payment terms under option (b) have the primary purpose of 
providing T with financing. The cash selling price is the monthly fee of 140 
because it reflects the amount due when the monthly hosting services are 
provided to C. A comparison of the payment terms between options (a) and (b) 
indicates total cumulative interest of 840 and an implied discount rate of 13%.
T considers whether factors indicating that a significant financing component 
does not exist apply in this case and concludes that they do not. T determines 
that the financing component is significant because the difference between 
the cumulative cash selling price of 5,040 and the financed amounts of 4,200 is 
840, or approximately 20% of the financed amount. Therefore, an adjustment to 
reflect the time value of money will be needed if C elects option (b) to pay at the 
beginning of the contract.
T evaluates whether the implied discount rate of 13% is consistent with 
the market rate of interest for companies with the same credit rating as its 
own. Assuming that it is, T recognises revenue of 5,040 rateably over the 
contract term as the performance obligation is satisfied and interest expense 
of 840 using the effective interest method. The amount of interest expense 
to recognise each period is based on the projected contract liability, which 
decreases as services are provided and increases for the accrual of interest.

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68 | Revenue – IFRS 15 handbook
Below is one example interest calculation under the effective interest method.