Revenue – ifrs 15 handbook

A cancellable contract may contain a material right
When a contract is cancellable without significant penalty, a material right may 
exist for the cancellable period of the contract. This is because a contract that 
can be cancelled without a substantive termination penalty is economically 
similar to a contract with a renewal right. For example, a three-year contract that 
allows the customer to cancel at the end of each year without a substantive 
termination penalty is no different from a one-year contract with two one-year 
renewal options. Therefore, an entity considers whether the optional renewal 
periods give rise to a material right.
 
Additional application examples
Example 3A – Custom product with learning curve effect: No 
material right
Automotive Supplier S enters into a two-year framework agreement with 
Carmaker M to manufacture a custom part. M is committed to purchasing 
a minimum of 500 parts for 200 per part. Each part is a distinct good that is 
transferred at a point in time. If M purchases between 500 and 700 parts, 
then the price per part for those parts decreases to 180. For purchases above 
700 parts, the price per part decreases to 150. 

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10 Other application issues | 271
10.4 Customer options for additional goods or services
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The decreases in the price per part are consistent with the expected reduction 
in S’s costs along its learning curve. The price reductions are also consistent 
with S’s typical decrease in price for other mature parts of a similar size and 
complexity.
S considers that there is some level of accumulation because M achieves the 
discounted price of 150 only if it purchases more than 700 parts. However, 
because M is committed to purchasing 500 parts under the contract, S 
determines that this indicator is not significant to its analysis. 
In the absence of any other quantitative or qualitative factors, S concludes that 
the discounted prices on the optional purchases reflect the stand-alone selling 
price for those parts and the contract does not include a material right.