Revenue – ifrs 15 handbook

Application of the practical expedient to a contract with multiple 
performance obligations
In a contract with two or more performance obligations, identifying the period 
between customer payment and the transfer of goods or services may present 
challenges, especially when the performance obligations are satisfied at 
different points in time and consideration is paid over time or all at once. 
In some contracts that include consideration paid over time, one performance 
obligation is completed in the early stages of a contract, whereas a second 
performance obligation continues for an extended period of time. In 
these cases, the entity generally allocates each payment received to both 
performance obligations in the contract on a pro rata basis to calculate the 
financing component and determine whether the practical expedient applies 
(rather than allocating payments to a single performance obligation until it has 
been fully paid, as would be the case with a first-in, first-out (FIFO) allocation).
In other contracts, consideration includes an up-front payment and performance 
obligations are completed consecutively over time. An entity evaluates all 
relevant evidence, including termination clauses, to determine whether 
it is appropriate for an up-front cash payment to be allocated to the first 
performance obligation when determining whether the practical expedient can 
be applied at the contract level.
A contract with an implied interest rate of zero may contain a 
financing component
When the consideration to be received for a good or service with extended 
payment terms is the same as the cash selling price, the implied interest rate is 
zero. However, a significant financing component may still exist.
For example, retailers sometimes offer a promotional incentive that allows 
customers to buy items such as furniture and pay the cash selling price two 
years after delivery. Judgement is required to evaluate whether in these 
circumstances an entity is offering a discount or other promotional incentive 
for customers who pay the cash selling price at the end of the promotional 
period equal to the financing charge that would otherwise have been charged in 
exchange for financing the purchase. 
If the entity concludes that financing has been provided to the customer, then 
the transaction price is reduced by the implicit financing amount and interest 
income is accreted. The implicit financing amount is calculated using the rate 
that would be used in a separate financing transaction between the entity and 
its customer.

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74 | Revenue – IFRS 15 handbook