Revenue – ifrs 15 handbook

Example 21 – Determining whether an arrangement has a 
significant financing component: Payment in arrears and an over-
time contract
Developer D buys land and obtains approval to develop a retail centre. D then 
enters into a contract with Company V, a large listed property company, to sell 
the land and retail centre for a fixed price of 1 million. Under the contract, V will 
pay the full amount on completion of construction, which is expected to be in 
five years’ time. D has also determined that it would apply a rate of 5% if it were 
to enter into a separate financing transaction with V. 
D determines that revenue will be recognised over time and that the contract 
includes a significant financing component, owing to the five-year period 
between performance and payment and the 5% interest rate. D does 
not identify any indicators that the deferred terms are for reasons other 
than financing.
Example 22 – Determining whether an arrangement has a 
significant financing component: Financing component is not 
significant
Telco R enters into a contract with Customer S for a two-year wireless service 
plan at 85 per month (the stand-alone selling price is 65 per month). In the 
same contract, S buys a handset for 130 (the stand-alone selling price is 630). R 
determines that the contract term for accounting purposes is two years. 
The transaction price and stand-alone selling prices in the contract are 
summarised as follows. 
Transaction 
price
Stand-alone 
selling price
Wireless service
2,040 
(85 × 24 months)
1,560 
(65 × 24 months)
Handset
130
630
Total
2,170
2,190
There is a difference in timing between performance and payment because 
the handset is delivered on day one and payment for at least a portion of 
that handset occurs over 24 months. Consequently, the contract includes a 
financing transaction. 
However, because there is an overall discount on the bundle (2,170 transaction 
price vs 2,190 stand-alone selling price), R needs to allocate that discount 
before determining whether the financing component is significant. This is 
because it is necessary to determine the cash flows that relate specifically to 
the handset. To allocate the discount, R allocates the transaction price based on 
relative stand-alone selling prices (see 
4.2.1
). This results in an allocation of 624 
to the handset and 1,546 to the wireless service.

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3 Step 3 – Determine the transaction price | 77
3.2 Significant financing component
| 
The contract does not specify an interest rate. R concludes that 7% reflects 
the rate that would be used by R and S in a separate financing transaction. R 
then calculates the present value of the payment stream related to the handset 
(i.e. 624 less 130 repaid over 24 months) using the discount rate of 7%, which 
results in an imputed interest component of 33. The relative value of the 
financing component of 33, compared with the total contract price, is less than 
2%. Based on its assessment of all relevant qualitative and quantitative factors, 
R concludes that a financing component that represents less than 2% of the 
contract is not significant and does not account for a financing component in 
this contract.