Revenue – ifrs 15 handbook

Example 11 – Cumulative catch-up adjustment for consideration 
received before a contract exists
IFRS 15.16
Company C and Customer D enter into a 12-month service agreement that 
requires D to pay service fees of 800 per month. The agreement expires on 
31 May, but C continues to deliver services and D continues to pay 800 a month. 
A new agreement requiring a fee of 1,000 per month is signed on 31 July, which 
applies retrospectively from 1 June.
C’s legal counsel advises that an enforceable obligation for D to pay C for 
services provided in June and July did not exist before the new agreement was 
executed on 31 July. C therefore concludes that a contract did not exist in June 
and July.
Because the existing contract was terminated on 31 May, C records the June and 
July payments of 1,600 received from D as revenue only once performance in 
those months is complete and substantially all of the promised consideration of 
1,600 is collected and non-refundable.
Alternatively, if that was not the case then C would defer 1,600 of consideration 
received and recognise it as a liability until there was an enforceable contract 
(31 July). C would recognise 2,000 as of 31 July on a cumulative catch-up basis 
(1,000 for each month) once the agreement is enforceable because the pricing 
of 1,000 applies from 1 June. For further discussion of the timing of revenue 
recognition when an entity initially concludes that a contract does not exist and 
subsequently determines that a contract does exist, see 
5.3.1
.
However, if it had been determined that an enforceable contract existed as of 
1 June even in the absence of a formally executed agreement on 31 July, then 
revenue would have continued to be recognised on a monthly basis based on 
a legal interpretation of the enforceable rights and obligations of the parties. 
Because the monthly fee amount may be uncertain, C would be required to 
estimate the total amount of variable consideration (subject to the constraint) 
to which it would be entitled in exchange for transferring the promised 
services (for further discussion of variable consideration and the constraint, 
see 
Section 3.1
). In this case, the signing of the contract on 31 July would be 
accounted for either as an adjustment to the variable consideration or, if the 
consideration was not deemed to be variable, as a contract modification. For 
further discussion of contract modifications, see 
Section 8.2
.