Revenue – ifrs 15 handbook

Evaluating whether costs of rework are significant
The standard does not provide guidance to help evaluate whether the cost to 
rework an asset for an alternative use is significant. Therefore, judgement is 
required in making the evaluation and consideration is given to both quantitative 
and qualitative factors 
The following are some factors that an entity may consider when making this 
determination.
– 
Level and cost of customisation:
If the customisation itself is significant, 
then the cost of rework may be significant. For example, if the customisation 
of the asset occurs over a significant period of time and involves significant 
development and design activities or represents a significant part of the 
cost of the finished product, then the cost to rework the asset for another 
customer may be significant. In contrast, if the customisation occurs over a 
short period of time and does not represent a significant portion of the overall 
cost, then the cost to rework may not be significant. 
– 
Incremental cost to rework vs the original costs:
If the cost to rework an 
asset and produce a finished product is commensurate with the original cost 
of customisation, then the cost to rework may be significant. In contrast, if 
the cost to rework the asset is insignificant compared with the original cost 
of the asset, then the rework costs may not be considered significant. 
– 
Activities required to rework the asset:
If the activities required to rework 
the asset involve design and development activities, then the cost of rework 
may be more significant. However, if the materials can be quickly converted 
into a raw material to be used in the entity’s normal process, then the cost 
may not be as significant. For example, an entity may produce glass materials 
customised to the size and shape for a particular customer but could easily 
melt the glass to be reused as a raw material. 

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– 
Ability to sell the reworked asset at a reasonable profit margin:
Although 
the profit margin would be expected to be less than if no rework occurred, 
if the entity expects to recover the costs plus a reasonable margin when 
compared with sales of similar goods then the cost of rework may not be 
significant. The entity should consider both the absolute monetary amount of 
margin to be recovered and profit margin percentage in evaluating whether it 
could expect to receive a reasonable profit margin. For example, if an entity 
produces a low-cost, low-margin product, then any incremental cost may 
have a significant effect on margin percentage but not a significant effect on 
the absolute monetary amount expected to be recovered. 
– 
Amount of the asset that cannot be reworked:
An entity may be unable to 
rework the asset or a significant portion of the component parts – e.g. if the 
disassembly process would significantly damage the component parts so 
that they cannot be reused or the raw material cannot be worked into other 
products. That would be considered a significant economic loss, which is a 
practical limitation on alternative use of the asset.