Revenue – ifrs 15 handbook

Enforceable right to payment for standard materials used as 
inputs
IFRS 15.BC142
Contracts with customers to manufacture or construct goods with no 
alternative use to the entity may require the use of standard raw materials or 
components as inputs into the product being manufactured or constructed. In 
many cases, these inputs (including work in progress) remain interchangeable 
with other products until they are integrated into the customer’s product – i.e. 
they have an alternative use. The entity will often not have an enforceable 
right to payment for these standard inputs until they are integrated into the 
customer’s product. 
In these circumstances, the entity treats the raw materials or work in progress 
as inventory until they are incorporated into the customer’s product. The fact 
that the entity does not have an enforceable right to payment for standard 
materials until they are integrated into the product being manufactured does not 
result in the arrangement failing to meet Criterion 3. An entity’s right to payment 
is assessed for performance completed. Standard materials are not considered 
completed performance until they are integrated into the production process. 
The assessment of an entity’s right to payment is for the standard materials 
once they are integrated.
Termination of an over-time contract
IFRS 15.BC142
In some cases, an entity that has a contract meeting Criterion 3 for recognition 
of revenue over time may choose not to enforce its right to payment. For 
example, an entity may permit a customer to terminate a contract when no 
termination right exists. In these cases, an entity needs to consider carefully 
whether its right to payment remains enforceable such that Criterion 3 is met at 
contract inception for similar contracts.

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5 Step 5 – Recognise revenue when or as the entity satisfies a performance obligation | 127
5.2 Performance obligations satisfied over time
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If an entity chooses to waive its enforceable right to payment, then a question 
arises about how it should account for the termination – in particular, the 
revenue that has been recognised over time under Criterion 3. It appears 
that in these circumstances it is generally appropriate to reverse the revenue 
previously recognised for which the right to payment has been waived.
For example, Developer D enters into a contract to sell an apartment to 
Customer C for 100. The expected construction cost is 60. C is required to make 
an up-front payment of 30, with the remaining 70 due on completion of the 
apartment. C cannot terminate the contract and D has the right to complete the 
apartment and require C to pay the promised consideration. D has determined 
that this right is enforceable in its jurisdiction.
D determines that its contract with C meets Criterion 3 for the recognition 
of revenue over time and that a cost-to-cost input measure of progress is 
appropriate. 
When the apartment is 80% complete, C approaches D with a request to 
terminate the contract. Considering C’s circumstances, as an exception to 
its customary business practice D agrees to terminate the contract, thereby 
waiving its right to complete the apartment and enforce payment of 100 in cash 
from C. D also agrees to refund the up-front payment of 30 to C.
At the time of the termination, D had recorded the following journal entries to 
recognise revenue and costs over time as the apartment was constructed.
Debit
Credit
Contract asset
50
Cash
30
Revenue (100 × 80%)
80
To recognise revenue for construction of 80% of 
apartment
1
Cost of sales
48
Cash/individual accounts related to construction
48
To recognise cost of sales for construction of 
apartment performed to date
1
Note
1. For the purposes of this example, all journal entries recorded over time are 
summarised and presented as one.

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128 | Revenue – IFRS 15 handbook
We believe that it is generally appropriate for D to reverse the previously recognised 
revenue and cost of sales. Therefore, D should record the following entries.
Debit
Credit
Revenue
80
Contract asset
50
Cash
30
Inventories – work in progress
48
Cost of sales
48
To reverse revenue and cost of sales on 
termination of contract
D carefully considers whether its right to payment remains enforceable such 
that Criterion 3 is met at contract inception for similar contracts. 
Modifying the example, D agrees to terminate the contract with C but 
retains the up-front payment of 30. In this case, we believe that it is generally 
appropriate for D to reverse the previously recognised revenue for which it has 
waived payment – i.e. 50 – and cost of sales. Therefore, D should record the 
following entries.
Debit
Credit
Revenue
50
Contract asset
50
Inventories – work in progress
48
Cost of sales
48
To reverse revenue and cost of sales on 
termination of contract
D carefully considers whether its right to payment remains enforceable such 
that Criterion 3 is met at contract inception for similar contracts.

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© 2019 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
5 Step 5 – Recognise revenue when or as the entity satisfies a performance obligation | 129
5.2 Performance obligations satisfied over time
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